Aluminum markets were pushed into uncertainty this week as The London Metal Exchange was forced put on hold new rules to tackle the long warehouse queue problem that aluminum buyers blame for increasing the price of their products. The new rules were due to take effect at the start of April, but were thrown into disarray Wednesday when the London High Court said the consultation procedure for LME’s new “linked” load-in, load-out rules were “unfair and unlawful,” and set the rules aside. UC Rusal, the world’s largest aluminum producer, filed the lawsuit against the LME.
We here at MetalMiner have been aggressively reporting the load-in, load-out problem story since last summer. This Q&A with Managing Editor Lisa Reisman and Contributing Editor Stuart Burns examines all of the issues surrounding aluminum warehousing, outside investment and where buyers and producers can go from here under the existing rules.
Jeff Yoders: UC Rusal has won the first round of its lawsuit against the LME in the United Kingdom’s High Court, in that the judge ruled LME’s proposed new rules should have included or made reference to the option of banning or capping rent in queues. Is physically getting the aluminum out for sale more important than the cost of warehouse rent?
Stuart Burns: The objections consumers raised last year and the cause of the LME’s rule changes were largely the physical premiums consumers have been forced to pay over and above the LME aluminum quotation. They see the load out queues as one manifestation of the distorted aluminum market, some blame the queues totally for causing the raised premiums but most acknowledge they are but one part of a wider problem. For most consumers, the warehouse rent is irrelevant as they don’t source their physical metal from the LME system, but knowing they have a near-guaranteed additional rent period of six-twelve months even for cancelled warrants, of course, gives the warehouse operator additional revenue from which premiums can be paid to attract new deliveries into the warehouse.
Lisa Reisman: To me, Rusal is arguing about how to fix a symptom, not the cause. If we applied a root-cause analysis to the entire load-out/high premium issue, we’d discover that the scheme works best for the producers, long load out queues have the effect of jacking up midwest premiums. In addition, producers strike deals with end users based on that midwest premium. It’s a win-win for producers all-around.
JY: In that vein, Rusal accounts for 9% of the world’s primary aluminum output. This graphic shows the entire LME-price, warehousing relationship. Are primary producers such as those listed and Rusal the ones benefiting the most from the current setup?
SB: Clearly the primary producers are benefiting from the system, they are achieving the LME price plus an additional physical delivery premium up to the midwest premium in the US or the Rotterdam premium in Europe for every spot sale, and most contract sales, they make. Hence Rusal’s unprecedented step of taking the LME to court to prevent the rule changes damaging that status quo. But, to be fair to the producers, they did not cause this divergence in pricing, nor is there any evidence they are exacerbating it now by withholding metal from the market or by artificially creating a physical shortage. Primary smelters are beneficiaries of the situation certainly but they did not cause the distortion.
LR: Essentially, any designated LME-warehouse-approved producer is benefiting from the current setup. Other non-registered LME producers may also be benefiting.
Upcoming: Can market competition end the queues?