Complaint over aluminium logjams reaches EU watchdog -consumers

Mon Dec 3, 2012 12:26pm EST

* Buyers face record surcharges, queues at LME warehouses

* Glencore and Trafigura among owners of warehouses

* New LME owner inherits controversy over warehousing

By Maytaal Angel and Susan Thomas

LONDON, Dec 3 (Reuters) - The European Union's competition watchdog has received a complaint against owners of metal warehouses for being so slow to release aluminium that it is forcing up prices for manufacturers, a consumer body said.

"I'd expect the competition authorities to be looking at this as the subject has been raised with them," said Malcolm McHale, president of the Federation of Aluminium Consumers Europe (FACE).

FACE and other consumer sources did not name the warehouse companies concerned in the complaint to the European Commission Directorate General for Competition. Any delays at warehouses mean buyers pay more in storage costs before they take delivery of the metal.

Glencore and Trafigura are among commodity trade houses that own warehouses in Europe registered by the London Metal Exchange (LME), the world's biggest metals marketplace.

Both Glencore and Trafigura, contacted by Reuters, declined to comment on the complaint.

Some metal market participants say trading companies are acting within their rights and that long queues are largely the result of the difficulty and expense of moving aluminium out of vast sheds in ports such as Vlissingen in the Netherlands.

The European Commission competition body and the LME declined to comment on the report of a complaint.

Consumer sources said the watchdog, which has the power to impose fines of up to 10 percent of company revenues, had not yet opened an investigation, although it has to follow up on complaints.

"When someone says the market is being kept short, and big finance houses who are LME members are managing massive inventories of metal in warehouses and outside warehouses, where else would you go but the competition authorities," McHale of FACE said.

McHale declined to say when the complaint had been made or to name the consumers who had complained. One industry source said they included a major maker of aluminium goods.

The complaint follows one made by aluminium manufacturers to the commission's enterprise and industry department, which is also inquiring into the accusations. A source said the same companies had complained to competition authorities.

The controversy over warehousing is now a problem facing the LME's new owner, Hong Kong Exchanges and Clearing Ltd (HKEx) , whose $2.2 billion takeover of the metal exchange was approved by British regulators last week.

Warehouses registered by the LME at ports around the world are supposed to allow companies that need metal to take delivery of supplies, if necessary, against the exchange's futures contracts.

Normally the consumers would buy metal under long-term contracts, but the warehouse network allows the LME to perform its role as a market of last resort.

Manufacturers have long struggled to compete for aluminium supply with banks and trade houses that hold stockpiles of the metal for years on end as collateral for finance deals.

Their problems have come to a head as queues, sometimes lasting months, have developed across the LME warehouse network.

Industrial consumers say the queues result from warehouse owners concentrating metal into sheds at single locations and releasing it only at the minimum daily rate mandated by the LME.

SURCHARGES

The result, makers of aluminium goods say, is to keep even more metal away from industrial buyers, pushing up surcharges or "premiums" for the metal.

A concern is that the queues have developed only at LME warehouses owned by banks or commodity traders. Critics say they stand to profit both from high premiums and from gaining insight into price drivers such as warehouse inventories.

"It is a conflict of interest but there is no law that prohibits banks and trade houses owning warehouses or financing the storage of commodities. The problem is when this conflict of interest translates into anti-competitive practice," said a source who is in contact with the competition authorities.

Spot market aluminium premiums - paid over the LME cash price to secure physical delivery - have risen so high this year they increasingly form a key part of the revenue of aluminium producers, even helping keep some smelters afloat.

Manufacturers of items like soft drink cans, however, say the premium has at times exceeded the conversion charge they get for turning aluminium into finished products, prompting some to lobby the authorities.

"There's quite a number of extruders that have had to reduce or shut down capacity. It's impossible to pass through increased premium costs," said an executive at a major aluminium fabricator based in Europe.

The LME, which has come under criticism for its handling of warehouse backlogs, recently raised its minimum load-out rate in a bid to prevent other metals like nickel, tin, copper and lead from getting stuck behind the queues for aluminium, and more recently, for zinc.

It says that queues exist primarily because of a metal surplus made profitable by financing deals, and that it cannot eliminate them through raising the load-out rate. It also says it cannot dictate who owns its warehouses.

Metal buyers hope the exchange's new owners might tackle the problem forcefully, especially as the big banks and trade houses who own the warehouses have less influence on its policy after they sold their LME shares during the takeover.

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