UPDATE 1-LME changes hurt aluminum premiums -Alcoa executives

Tue Oct 8, 2013 7:24pm EDT

* LME 'very irresponsible' for warehousing action -Kleinfeld

* Financing deals providing some support to falling premiums

* Metal is moving into off-exchange storage

NEW YORK, Oct 8 (Reuters) - Global aluminum premiums have fallen due to "confusion" over the London Metal Exchange's proposal announced on July 1 to overhaul its warehousing policy, Alcoa Inc Chief Financial Officer and Vice President William Oplinger said on Tuesday.

Premiums paid on top of the LME benchmark price have dropped 17 percent in Europe, 4 percent in Japan and 11 percent in the United States in just three months, he said.

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

In Tuesday's conference call, Kleinfeld said the LME was "very irresponsible" by going public with its proposal without consulting the industry first.

The call followed the release of 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 severe pressure to resolve the problem, the LME's new owners outlined sweeping changes to its warehousing policy in July after complaints from end users, including Novelis Inc and beverage can makers, 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. UK and U.S. 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, 2014.

Premiums in the United States have fallen to 10-11 cents per lb from a record 12 cents before the announcement in July.

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 likely to shut down more capacity to remove the excess in the global market, analysts say.

Alcoa has shuttered 16 percent, 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 executives said on Tuesday.

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

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