(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, July 17 The legal battle between the
London Metal Exchange (LME) and Russian aluminium giant Rusal
will resume on July 29.
The LME is appealing a previous British High Court ruling
that it failed properly to consult on a proposal for cutting
load-out queues at some of its registered warehouse. The rule
change, linking load-in and load-out rates, was originally due
to come into force in May but has been put on ice after Justice
Phillips' call that the consultation was "legally unfair".
This legal tussle cuts to the heart of the aluminium market.
There are currently 2,915,100 tonnes of the stuff waiting
for a physical delivery slot in the LME warehouse system, most
of it at just two locations; Vlissingen in the Netherlands and
Detroit in the United States.
Aluminium consumers have blamed the queues for soaring
physical premiums, which have caused an unprecedented divergence
between the price of aluminium on the LME and the "all-in" price
payable by manufacturers.
Producers, not least Rusal, fear what might happen if all
that backlogged metal were to hit the market-place.
The stakes appear high. Higher, indeed, than when Justice
Phillips passed down his judgement on March 27. Over the
intervening period the LME three-month aluminium price
has rallied from $1,730 per tonne to just shy of the $2,000
mark. Premiums, meanwhile, remain super-strong, trading just
under 20 cents per lb ($440 per tonne) on the CME <0#AUP:>.
But, in truth, this latest round of legal fisticuffs might
be less significant than it seems. It is certainly important for
the two protagonists, given the potential loss of face for
whoever loses. And it will be keenly watched by lawyers, given
the precedence set for all sorts of consultations, both in the
public and private sectors.
On current trends, though, it might not be the
make-and-break for the aluminium price that many expect.
This is in part due to the nature of that original High
Court ruling, which concerned legal due process not potential
In fact, Justice Phillips rejected Rusal's contention that
the proposal would materially affect its business, arguing that
"it would be improper for the LME to take into account which
category of its users would win and which would lose" from any
Nor did he judge against the proposal per se. Rather, his
core criticism was that the LME should have explained more
explicitly why it had rejected an alternative proposal to cap
rents for metal sitting in the queues.
Never mind that the LME had taken legal advice in 2000,
2005, 2007 and 2012 about doing so or that it had sought the
views of the European Commission in 2000 and 2007. It hadn't,
Phillips said, explained fully enough in its consultation
document the legal difficulties of rewriting its warehouse
contract and overriding existing commercial contracts between
holders of the metal and warehouse companies.
The LME has revisited the whole issue yet again but the
outcome of the most recent legal review of its warehousing
contract is still under wraps. It seems, unlikely, though, that
the law has dramatically changed since 2012. Capping rent is
still likely to be a legal non-starter.
So what does this all mean were the LME actually to lose its
Not much. It could simply launch a new consultation, laying
out in excruciating legal detail why capping rents, appealing
though it would be to many, including the LME, is simply not
workable and why therefore the load-in load-out formula is the
best way of cutting queues.
All that changes is the timing not the substance of the
proposed rule change.
And time is not as important as it seems either.
It is clear that the most aggressive queue-building
warehouse operators have changed their operational behaviour
anyway, acting as if the rule change had already happened.
The number of locations affected by queues has shrunk from
five to two and the number of operators from three to two.
The LME's most recent "queue" report, itself a product of
the consultation, shows that as of the end of June there were
only queues at Metro sheds in Detroit and at Pacorini sheds in
Moreover, the "secondary" queues for other metals trapped
behind the aluminium log-jams shrank significantly over the
course of June to 45 days at Detroit and to just nine days at
the Dutch port.
True, both locations actually saw an increase in aluminium
queues, that at Motown rising to 681 days from 675 days in May
and that at Vlissingen to 774 days from 716 days.
But this was due to more cancellations of LME warrants for
physical drawdown, particularly at Vlissingen, which saw almost
175,000 tonnes of metal join the load-out queue.
Critically from the LME's perspective, though, inflow has
dropped dramatically to the point of zero at Detroit, where the
last heavy-volume arrivals came in February. Pacorini Vlissingen
received 31,000 tonnes of aluminium last month, less than half
of the tonnage loaded out. This is exactly what the load-in
load-out formula was meant to achieve, choking off the supply of
fresh fuel for firing up the queues.
Might behaviour change in the event of an adverse legal
judgement against the LME?
It seems highly unlikely when it comes to Metro. Owner
Goldman Sachs has taken a public relations hammering over
its metal warehousing business and has no appetite, it seems,
for more of the same. It confirmed in a letter to the LME that
it was already and would continue complying with the rule change
as if it had come into effect.
Glencore, which owns Pacorini, is a different
animal and one with almost unlimited amounts of physical
aluminium at its disposal, given its multiple off-take
agreements with smelters around the world. But even this most
aggressive of houses might baulk at being seen to be the only
company visibly not working with the grain of the LME's
NOW YOU SEE IT
But perhaps the most interesting development, and one that
argues against a court-room effect on the aluminium price, is
what's been happening to premiums themselves.
They remain close to the elevated heights reached in the
short-covering panic of early January. And this despite the fact
that aluminium is flowing out of the LME system at an average
daily rate of around 8,150 tonnes.
Since the start of the year a total 1.18 million tonnes have
left LME sheds and total registered inventory has just fallen
below the 5-million tonne level for the first time since
So why has physical availability not improved? It seems
self-evident that barely any of that metal has touched the
physical market but has rather gone into off-market storage,
which is cheaper than LME storage and therefore much more
attractive for those locking metal up in finance deals.
Cash-and-carry financing, using the LME forward curve to
generate a low-risk return on capital, remains in robust good
health. The era of low interest rates, which underpin the trade,
may be approaching an end but right now money is still cheap and
the financing game is still attractive.
From a manufacturer's perspective, aluminium sitting in a
financing deal off market is as inaccessible as aluminium
sitting in an LME queue. Which is why premiums remain untouched
by the steady flow of departures from the LME system.
This is the core driver of the aluminium market's
distortions and those high stocks, whether visible or invisible,
remain the Damocles Sword hanging over the entire industry.
That won't change whatever the outcome of the next bout of
legal sparring between the LME and the world's largest aluminium
(Editing by William Hardy)