Set up in 1877 to provide a venue for trade conducted among metal merchants in London, the LME was sold in 2012 to the operator of the Hong Kong stock exchange. In 2013, it was a defendant in lawsuits accusing Goldman Sachs, JP Morgan and Glencore-Xstrata of rigging the aluminium market.
Aluminium producers demand LME release more positioning, warehouse data
The world’s two biggest aluminium producers are calling on the London Metal Exchange (LME) to boost transparency by releasing more detailed data on long and short positions as well as about who are holding inventories.
Russia’s United Company Rusal and US-based Alcoa are urging the LME, the world’s biggest marketplace for industrial metals, to match its US rival, the CME Group , in providing data about the make-up of investors positions.
“There is a need for greater transparency in the London Metal Exchange’s disclosure of commercial and non-commercial positions on the exchange,” Oleg Mukhamedshin, Rusal’s deputy chief executive, told Reuters on Wednesday.
“The LME could provide appropriate access to its existing data that would transform the way we understand how the aluminium market is now working.”
Rusal is the world’s biggest producer of the metal used in transport and packaging, while Alcoa is No. 2.
In the United States, the Commodity Futures Trading Commission (CFTC) requires exchanges to release detailed positioning information. The resulting Commitment of Traders weekly reports are closely watched by investors.
In base metals, the US data includes copper, but that only covers a fraction of the global market because CME volumes are much smaller than those of the LME. The CME does not have contracts in other base metals such as aluminium and zinc.
Alcoa included the call for greater transparency in a letter sent to the LME dated September 10, in which it laid out its opposition to possible changes to warehousing rules, which are aimed at placating angry end users who say that long wait times and incentive payments have inflated physical metal prices.
The LME, which is owned by Hong Kong Exchanges and Clearing, said by email: “We welcome and will continue to listen to and consider market views, and we will continue to make market transparency a top priority.”
Currently, the LME provides open interest data and limited long-short positioning data showing when large positions emerge, but it does not show whether positions are held by speculators or industrial interests.
Rusal’s Mukhamedshin said knowing the level of speculative positions is essential in a market where LME trading volumes last year in aluminium derivatives was more than 30 times higher than industrial demand for the metal.
Alcoa is also pressing the LME to release more data. An Alcoa spokeswoman said the company had called for more transparency in a submission to a US Senate subcommittee in July.
“The dramatic increase in trading volume on the LME in recent years is predominantly due to the increased trading activity from financial investors who do not participate in the underlying physical markets,” Alcoa said in a statement to the committee.
“Improved transparency into the sources of trading on the LME ... is an essential first step toward improving confidence in the marketplace.”
Rusal and Alcoa also called for the LME to release more information regarding warehouse inventory data.
“We also believe that transparency in reporting also needs to be applied to the reporting of warehouse stock by company in each LME warehouse location as well as the category of owner of metal placed on warrant,” Mukhamedshin said.
The LME releases daily data on the tonnage arriving and departing at each warehouse location.
The metals warehousing business has stoked controversy as warehouse firms have made money by building up stocks and allowing queues to grow for clients seeking to withdraw material, all the time charging rent for storage.
End users say those steps have caused long wait times in warehouses which have distorted supplies and inflated physical prices to record highs.
Complaints by aluminium users have led to a string of US lawsuits and an LME proposal to overhaul its delivery system from next April.
In its third effort to resolve the problem in as many years, the LME proposed in July linking the rate at which a warehouse, with big stockpiles and long wait times of more than 100 days, is required to load out material to the rate at which it brings in new metal.
The 136-year old exchange hopes the move will head off an escalating crisis over its warehousing policy that has drawn scrutiny from UK and US regulators and ease frustration among industrial users, including beer and can maker MillerCoors and Novelis which manufactures sheet used to make cans.
Many metal users have complained that record high physical prices are unjustified by supply-and-demand fundamentals. The market is burdened by a massive global surplus.
In Alcoa’s Sept. 10 letter, president of materials management, Tim Reyes, said complaints about the long wait times are a “red herring” and suggested the LME launch a new contract for the premium which would complement the exchange’s existing aluminium futures contract.
The premium represents the additional cost of delivering metal from an LME warehouse in Detroit or New Orleans or a producer plant to the Midwest and is paid on top of the LME benchmark.
A regional premium contract would “provide a vehicle for market participants to more effectively manage premium price risk and offer a more open premium price discovery process,” Reyes said.
While buyers can protect against major swings in the underlying price by hedging on the LME, a large component of the aluminium consumers’ cost and risk is exposed.
At about US$250 per tonne, the premium is about a fifth of the total cost based on a three-month LME aluminium of US$1,800 per tonne. That is much higher than historic averages around 5 per cent, dealers said.
Alcoa’s suggestion is not new. The CME launched a cleared Midwest premium contract in April last year and the first trade was only transacted last month.
Last year, the LME explored a possible North American aluminium contract to include the Midwest physical premium.
To be sure, producers worry that premiums will fall as a result of the rule changes, hurting their profits while LME prices are close to or below many smelters’ cost of production.
Without higher premiums to offset low underlying prices, producers are likely to shutter more capacity to remove the excess washing around the global market, analysts say.
In the long run, that will help LME prices recover and restore the market to balance after the distortions due to warehousing over the past four years, they say.
In the meantime, the LME board is expected to make a final decision on the warehousing proposal next month. If approved, the new rules would come into force on April 1 next year.
Industrial users, such as beverage can makers, logged their criticism of the plan earlier this week.