(Repeats with no changes)
By Susan Thomas and Josephine Mason
LONDON/NEW YORK, March 28 A court ruling has
faulted the London Metal Exchange for failing to consult users
on alternative ways to reduce vexing logjams in its warehousing
network, the backbone of the world's biggest market for copper
The remedy: Reconsider an option the LME has long believed
The High Court in London ruled in favor of top aluminum
producer Rusal on Thursday, saying the rule-making
process was "unfair and unlawful" because it had only presented
one viable option: reduce queues by limiting how much can be
brought in and out each day, a measure that has now been put on
hold days before it was due to come into effect.
The 22-page decision held several startling revelations
about the LME's secretive three-month consultation process,
including the fact that a landmark 2011 study into how to
resolve the lengthy waiting times that the LME had declined to
make public offered five different suggestions.
In particular, Justice Stephen Phillips wrote in his ruling
that the exchange should have publicly considered a measure the
LME and many experts had said repeatedly would be deemed
anti-competitive: banning or capping the rent that warehouse
operators could charge on any metal that got stuck in the queue.
The decision also said that the LME had consulted its
warehousing committee last September about banning rents, which
is an unpopular option among the committee members because many
of them own warehouses. The LME had started its own study of the
issue but did not disclose this information to the market.
The fact that the LME was reviewing competition law even
while moving forward with the "load in, load out" measures is
"tantamount to an admission that it had failed to make
sufficient enquiry and had failed to consider relevant matters
prior to commencing the consultation," Phillips said.
The decision, which the LME could appeal, dealt a deep blow
to the LME and its new owners, Hong Kong Exchanges and Clearing
, which had stood up to big banks and metal producers
in order to push forward new rules that would put to rest years
of complaint over long waits to pull metal out of storage.
Chief Executive Charles Li now faces a conundrum: appeal the
ruling or put forward revised proposals that may include options
the exchange does not believe would withstand legal scrutiny.
"Year in and year out we've been told that the LME cannot
cap rents because of legal issues," a metals industry executive
THE MOST 'RATIONALE' OPTION
The ruling threatens to unravel the exchange's years-long
effort to restore confidence among end users in its aluminum
contract, its biggest by turnover and liquidity but dogged
recently by queues as long as 18 months.
Due to lucrative financing arrangements, big banks and
traders that own warehouses, including Goldman Sachs and
Glencore, have profited from long queues that have
developed as buyers continue to pay rent while waiting to be
loaded out in turn. Metal users such as Coca-Cola Co have
complained about facing inflated prices.
Threatened with lawsuits by consumers and wary of
regulators, the LME thought it had finally found a solution
among its divided stakeholders.
Yet during the consultation period, the LME was flooded by
calls to ban or cap rents. At least 10 of 33 written responses
to the LME's July 2013 proposal recommended that option,
according to the ruling.
The exchange did not include the option in its consultation
despite saying in a November notice that the concept "appeared
to be one of the most rational and deliverable."
Philip Crowson, a former Rio Tinto economist, was asked by
the LME to commission and oversee an impartial 2007 study into
warehouse charges. He urged the exchange to be vigilant over all
warehouse rents and charges, but he said the LME did try to
challenge the constraints of British and EU competition law.
"They tried vigorously, and all the legal advice both from
Brussels and from London was that they weren't able to fix
maximum charges or warehouse ownership," Crowson said late last
year. "They certainly tried."
The LME said on Thursday that other reforms would go ahead,
including a logistical review, a new physical markets committee
and new position data. It had warned last month of "serious
concerns" over its ability to maintain an orderly base metal
market if forced to repeat the consultation.
Some industry sources say the setback for the exchange is
temporary. If it decided against an appeal, the LME could launch
a repeat consultation that would include both options - the load
in-load out rule and banning rent in queues, industry sources
Any delay from taking that route would not be as long as the
initial consultation, the sources said.
"This is a temporary setback for the LME. They didn't do
their homework, but even so it doesn't change anything," and
industry source said. "Make no mistake the rules will still be
(Editing by Jonathan Leff and Lisa Shumaker)