LME Down But Not Out as it Awaits London Court of Appeals Ruling

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As the aluminum-buying world eagerly awaits a UK Court of Appeals decision brought by the LME, initially expected to come down today, the “way out” in English parlance now appears more obvious: Follow the money.

As MetalMiner pointed out months ago, one only need follow the money path to determine how the current load-out queues benefit producers such as Rusal and Alcoa, not to mention warehouse operators.

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But Rusal’s legal challenge of the LME’s proposed rule-changes looks like nothing more than a stall tactic to delay the inevitable – reducing the queues and lowering the premiums warehouses pay to producers like Rusal and/or premiums that anyone in the market pays to the producers.

In fact, the legal case Rusal makes borders between the sublime and the ridiculous.

Here’s why.

The case hinges upon the fact that Rusal believes the consultation process for developing the new rules is “unfair and unlawful” (the LME proposed its modifications to the load-in/load-out rules without what the court called alternative options). This has nothing do with the new rules.

Instead, Rusal pointed to the fact that, for example, the LME did not include a recommendation to “cap rents,” which of course would have a far more harmful and negative impact on premiums that producers receive from warehouse operators. There are many alternatives that the LME could have included but simply did not and did not consult metal owners or producers about. Legal fights often involve making a case based on technicalities and not on merit.

Regardless, it falls to the UK Appeals Court failing to uphold or reverse the original March ruling. An attorney for Rusal speculated the decision could come as late as October.

And in an email statement to MetalMiner this morning, the LME had this to say: “The LME will analyse the content of any judgment and will update the market on its proposed way forward as soon as possible afterwards.”

Meanwhile, based on MetalMiner analysis…

To think the LME hasn’t created a contingency strategy for both outcomes to any appeals court ruling would appear naïve. In either scenario, the LME will likely deploy a strategy to reduce warehouse queues via load-in/load-out rules as well as other strategies – one for if Rusal wins the appeal, another for if the LME wins the appeal, which will likely pursue the load-in/load-out rules only.

Aluminum buying organizations as well as financial parties and warehouse operators should assume the LME will likely create new contracts inclusive of premiums as well as a product that allows for swaps, similar to the activity happening on OTC markets today. This would enable a warrant holder to exchange warrants for a price for a warehouse without a load-out queue.

An October decision obviously delays any rule changes for at least eight weeks.

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