London Metal Exchange

Alcoa hits out over LME policy changes

Aluminium producer says the exchange's 'irresponsible' move to overhaul warehousing has led to confusion and a drop in premiums

PUBLISHED : Thursday, 10 October, 2013, 12:00am
UPDATED : Thursday, 10 October, 2013, 12:39pm

Global aluminium premiums have fallen because of "confusion" over the London Metal Exchange's proposal to overhaul its warehousing policy, Alcoa chief financial officer William Oplinger said.

Premiums paid on top of the LME benchmark price had fallen 17 per cent in Europe, 4 per cent in Japan and 11 per cent in the United States in just three months after the proposal was announced on July 1, Oplinger said.

The comments came as Alcoa chairman and chief executive Klaus Kleinfeld lashed out at the LME's latest proposal to solve a year-long crisis that has damaged the exchange's reputation and cost industrial users billions of dollars in additional expenses.

Kleinfeld said the LME was "very irresponsible" by going public with its proposal without consulting the industry first.

Hong Kong Exchanges and Clearing bought the LME in June last year.

Alcoa's comments came after the aluminium producer reported better-than-expected third-quarter results as cost-cutting efforts offset weak LME prices.

Alcoa executives also renewed their call for the LME to improve transparency by publishing more data and to establish a regional premium contract as a way to solve a long crisis that has damaged the 136-year-old exchange's reputation.

Under pressure to resolve the problem, the LME's new owners outlined sweeping changes to its warehousing policy after complaints from end users about long wait times and big incentives paid by warehouses to lure metal to their facilities.

Those factors led to record physical prices and distorted supplies, they said.

British and US regulators are also investigating.

Under the new system, the LME would link the rate at which a warehouse with big stockpiles and wait times of more than 100 days is required to load out material to the rate at which it brings in new metal.

Rather than confusion over the issue, traders and end users say that premiums have come off record highs because warehouses have reined in those incentives since the rule change was proposed. If approved, it will come into effect on April 1 next year.

Premiums in the US have fallen to 10 to 11 US cents per pound from a record 12 US cents before the announcement.

Producers worry that premiums will fall as a result of the rule changes, hurting profits, even as LME prices are close to or below many smelters' cost of production.

Without higher premiums to offset low underlying prices, producers are expected to shut down more capacity to remove the excess in the global market, analysts say. Alcoa has shuttered 16 per cent, or 650,000 tonnes, of its annual capacity.

Even so, premiums have found some support from financing deals, which keep metal locked up in long-term storage and therefore off the market, Alcoa said.

In financing deals, traders store metal in warehouses because of low borrowing costs and a wide forward pricing, and sell it forward at a higher price.

Market participants have also increased the rate at which they move metal out of LME-registered warehouses and into lower-cost storage facilities.

That had created a "bigger and bigger" stockpile of off-exchange stock, Kleinfeld said.

There are more than 5.3 million tonnes of LME-registered stocks and analysts and traders estimate a similar amount is stored outside the LME system.