Rusal defends metals warehouse court challenge after criticism -letter

Mon Apr 7, 2014 8:27am EDT

* Rusal sends letter to customers after LME reform halted

* Denies trying to "stifle" reforms, freeze status quo

* Says reforms would not have freed up metal for consumers

By Eric Onstad

LONDON, April 7 (Reuters) - Russian aluminium giant Rusal , which won a court ruling last month that halted a key metals warehouse reform, has defended its move, denying it was seeking to freeze the status quo and "stifle" reforms.

Rusal, in a letter to customers seen by Reuters, was appearing to respond to harsh criticism by some aluminium buyers of its court case against the London Metal Exchange (LME), the world's biggest market for industrial metals.

The LME had planned to impose new regulations on April 1 on warehouses after long-standing complaints about delays of over a year to access metal at some depots.

But a reform to speed delivery of metal from the exchange's global network of warehouses was stopped on March 28 after a judge agreed with Rusal that the LME's consultation was unfair.

Loss-making Rusal worried the reforms would further depress the price of aluminium, widely used in drink cans, vehicles and airplanes.

Consumers had bitterly complained about difficulty in obtaining metal, even though millions of tonnes of inventories sit in depots, due to financing deals and also because of LME rules that have allowed long queues to develop.

The chief of U.S. firm Novelis, one of the world's largest users of aluminium for products such as beverage cans, had attacked Rusal following the court ruling, saying it sanctioned "the continuation of this destructive regime".

DIFFICULT TASK

Rusal, in the letter to customers, denied it was obstructing progress and said it hoped to help craft new reforms.

"Far from trying to stifle the LME's proposed reforms and preserve the status quo, Rusal recognizes that the LME has a difficult task to develop a strengthened regulatory framework," said the letter, signed by Steve Hodgson, Rusal's head of global sales. "Rusal remains ready to contribute to a renewed consultation process, that will be fair and of benefit to both producers and consumers."

A spokesman for United Company Rusal Plc confirmed it had sent a letter to customers on Friday in an effort to provide background on the court case and its aftermath.

The letter also warned about tight availability of metal even if the reform had gone ahead.

"It is doubtful that the proposed new rules will address the availability problem as most of the metal is likely simply to move to off-warrant warehouses and thus (be) still unavailable to consumers," it said.

Warrants are LME ownership documents for metal stored in its warehouses, but financiers often store metal in off-exchange depots due to lower rents.

Rusal said it was also worried about the increasing gap between LME aluminium prices and the total price consumers must pay for spot metal, which includes record-high premiums.

"The current situation in which the LME price is showing increasing divergence from the all-in price of aluminium is not in the interests of consumers or producers, and also one that concerns Rusal," Hodgson said in the letter.

"The industry needs a transparent price discovery system that allows rational decisions to be made on the basis of physical supply and demand."

LME benchmark three-month aluminium has gained 7 percent over the past 2-1/2 weeks, but it is down about a third due to an over supplied market since touching a peak of $2,803 a tonne in 2011.

The LME is owned by Hong Kong Exchanges and Clearing Ltd . (Reporting by Eric Onstad, editing by David Evans)

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