| NEW YORK
NEW YORK Feb 28 A series of public and private
meetings between the London Metal Exchange and its staunchest
critics in the United States has revealed a small but
significant shift in a years-long crisis over the exchange's
warehousing policy, sources said.
After a sweeping overhaul of the LME's contentious
warehousing policy, new CEO Garry Jones held three townhall
meetings last week with U.S. metal users, a rare public
relations tour meant to heal wounds and described by one New
York participant as "group therapy" after years of acrimony.
The cordial tone of the meetings in Atlanta, New York and
Chicago suggest that the exchange may have mollified many of its
most outspoken foes, according to sources who attended the
meetings. Many were surprised, having anticipated a fiery
exchange on an issue that has polarized the industry.
To be sure, it is not because consumers are happy. An
unprecedented spike in aluminum premiums to record highs this
year re-ignited concerns over the market, which many still view
as distorted by excessive stockpiling.
But there is a growing recognition that the LME may have
reached the limit of what it can do. Some are now renewing a
push for U.S. regulators and politicians to take up the fight
for even tougher oversight of the world's oldest and biggest
metals market and its warehousing network, sources said.
"I can't see a scenario where regulators can justify this.
If the LME can't do anything else, the regulators can," said a
source who followed the Chicago meeting.
Jones ended his whirlwind trip in Washington, D.C., on
Friday, meeting with Mark Wetjen, acting chairman of the U.S.
derivatives regulator, Commodity Futures Trading Commission,
sources familiar with the matter said.
The LME is regulated by the UK'S Financial Conduct
Authority, but the CFTC has jurisdiction over its U.S. business
through a 2001 no-action letter and the exchange's application
to give it foreign board of trade (FBoT) status.
While details of their discussion were not disclosed, their
meeting has sharpened the debate over possible intervention in
the United States, where Goldman Sachs's warehouse Metro has
drawn the most political, legal and regulatory scrutiny.
The LME declined to comment on the roadshow.
Big consumers, such as MillerCoors, that use
aluminum to make beverage cans, have complained that the LME's
warehousing policy has allowed warehouse operators owned by
banks and merchants to create logjams, distorting supplies and
inflating physical prices for the past four years.
Facing intense political and regulatory attention, the
exchange announced in November an unprecedented overhaul of its
storage rules, which will go into effect in April and will force
warehouses to deliver metal out at the fastest pace in the LME's
The U.S. tour was aimed at explaining how the new rules link
the rate at which storage firms deliver metal out with the level
of inflows, which will stop queues growing and shrink wait times
in five key locations in Europe, Asia and the United States,
where backlogs range between 200 days and one and a half years.
In a 70-page slideshow seen by Reuters, the LME showed
charts displaying wait times dwindling since last summer for
three out of the five locations that had big stockpiles.
"They said (the stock data) demonstrated the warehouse games
were over," said a source at the Atlanta meeting.
In the other two locations, however, the queues have
lengthened to between 550 and 650 calendar days, the chart
shows. While the cities are not identified, participants said
they were likely Detroit, where a third of the LME's total 5.3
million tonnes of aluminum is held, and Vlissingen in the
Netherlands, where Pacorini, which is owned by Glencore,
Private meetings with Novelis, MillerCoors and The CocaCola
Co., the most vocal critics of the LME's handling of the
controversy, likely kept the tone "cordial", a source said.
For some, the detente may only reflect a temporary lull
until the rules come into force in less than two months.
"The market can only really pass judgment once the rules
come into effect," said the participant at the New York meeting,
attended by some 70 traders, brokers and bankers.
The biggest outbrust was in New York when a scrap trader
criticized the LME for giving undue influence to speculative
investors, sources said.
EYE ON REGULATORS
The LME executives fielded questions at each meeting about
whether the rule change goes far enough, but they told
participants bigger changes would have caused even greater
"They said, 'We understand your argument and we don't
disagree with you. The queues are bad for us too because it
damages our price mechanism, but we can't make a rash change',"
said the source following the Chicago meeting.
So some U.S. participants are pinning their hopes on the
CFTC continuing to lead the charge ahead of its British and
Last summer, the commission opened a preliminary inquiry
into complaints that banks including Goldman Sachs and
merchants Glencore Xstrata Plc have inflated physical
aluminum costs through their ownership of metals warehouses.
Goldman and Glencore say there is no merit to the claims.
Even so, the issue has captured attention in the Capitol.
Senator Sherrod Brown, a Democrat from Michigan who chairs a
powerful committee overseeing Wall Street and commodities, is
pushing for U.S. regulators to increase vigilance over the LME
through its FBoT status, a spokeswoman said in an email.