Alcoa complains to UK, U.S. regulators about metals warehousing

LONDON/TORONTO Mon Oct 21, 2013 6:39am EDT

LONDON/TORONTO Oct 21 (Reuters) - Alcoa Inc, the world's second-largest aluminium producer, has complained to British and U.S. market regulators about a proposal by the London Metal Exchange to overhaul the LME's warehousing policy.

The LME must suspend its plan to change warehousing or risk damaging the entire aluminium market, Alcoa said in a letter sent on Friday to the UK's Financial Conduct Authority and the U.S. Commodity Futures Trading Commission.

The LME, the world's biggest marketplace for industrial metals trading, has proposed rules that would force warehouses to release more stocks than they take in if deliveries are delayed by three months or more.

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 that have distorted supplies and inflated premiums, or the difference between LME on-exchange prices and the actual price of physical delivery of metal.

But in its letter to regulators, Alcoa said it was fundamentally wrong for an exchange, which should act as a neutral platform, to alter the rules of the market with the express aim of moving prices, in this case regional premiums.

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

Alcoa said the LME had not acted fairly and transparently in putting together the proposal and that it had acted outside its proper role as an exchange.

"The LME does not appear to have given adequate consideration to the harmful effects which might arise from the proposal," it said in the letter, seen by Reuters. "These are likely to include reduced transparency, increased volatility and the possibility of market distortions."

Alcoa also said the LME had apparently not put in place safeguards to ensure its own interests do not conflict with maintaining a set of rules that are fair to all users.

It urged the LME to launch a new consultation that offered all market participants an equal right to be heard, safeguarded against conflicts of interest and considered a range of alternative approaches.

U.S.-based Alcoa and larger aluminium producer Rusal of Russia have already urged the LME to delay its decision and asked the exchange to release more-detailed data on long and short positions as well as inventories.

Earlier this month, Alcoa Chief Executive Klaus Kleinfeld lashed out at the LME's proposal to solve a years-long crisis that has damaged the exchange's reputation and cost industrial users billions of dollars in additional expenses.

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