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Novelis gives up on LME, seeks other avenues in warehouse battle
February 1, 2013 / 6:47 PM / 5 years ago

Novelis gives up on LME, seeks other avenues in warehouse battle

* LME says can’t resolve logjams, calls on industry

* Logjams only at warehouses owned by banks, trade houses

* Consumers pass complaints to EU watchdog

By Susan Thomas and Maytaal Angel

LONDON, Feb 1 (Reuters) - The world’s top maker of aluminium for beverage cans has lost patience with the London Metal Exchange’s failure to tackle access problems at the warehouses the LME monitors and says it will seek a solution elsewhere.

Novelis has long criticised the warehouse system for contributing to record-high price premiums for aluminium, a metal in chronic surplus.

“The LME sees no need to do anything else, even though they sympathise with the aluminium consumers,” Nick Madden, vice president and chief procurement officer at Novelis, a unit of Hindalco Industries, said in an interview.

Madden’s words follow a speech by Chris Evans, LME head of business development, who told a recent conference in the United States that the solution to the problem would have to come from the market, rather than the LME.

“I can only conclude that now that we have tried the direct approach and failed, Novelis will have to work through other stakeholders,” Madden said.

“We will continue to be active, we just have to find some other way to get attention, we have to try other avenues.”

Madden, whose company has been speaking out about the current LME warehousing problems since 2011, declined further comment.

Europe’s competition watchdog received a complaint late last year against owners of LME-registered warehouses for ramping up rental profits by letting long queues for metal grow at some locations.

NEW OWNERSHIP CREATES HOPE

Metal buyers also hope the exchange’s new owner, Hong Kong Exchanges and Clearing, will tackle the problem forcefully. The big banks and trade houses that own the warehouses will now have less influence on exchange policy after they sold their LME shares during the takeover.

For those warehouses, backlogs are lucrative because metal waiting to be delivered out continues to earn storage fees. They also say the backlogs are due to the logistical difficulties of moving large amounts of metal.

LME rules stipulate a low minimum load-out rate for metals stored in the warehouse network that the exchange monitors.

Warehouses do not have to deliver out any more than the minimum. They are also free to set their own rents, and even if the LME raises the load-out rate, they can raise rents to compensate for any loss of income.

Novelis has proposed that the load-out rate for the warehouses carrying the largest stockpiles should be trebled.

The LME rejects this proposal.

“There is no solution that the LME could or should propose. This isn’t a debate about delivery (out rates),” Evans told the U.S. conference.

“This is an aluminium industry problem, and it is the industry that must come up with a solution. If fabricators choose to sell at uneconomic levels, they will of course lose money.”

Fabricators are crippled by high premiums because they are paid a percentage of the LME base price for converting a sheet of metal into a can for example. They are not able to pass on the costs of premiums, which in some cases might equal their sale price.

Premiums for duty-paid aluminium in Rotterdam are currently at record highs of around $300 a tonne - about 15 percent of the LME base price. Benchmark U.S. Midwest spot aluminium premiums have also reached a record high.

They have been rising since the financial crisis pushed interest rates to near zero, making the financing deals both lucrative and safe.

The financing deals, which have locked up more than 70 percent of LME aluminium inventories, keep metal away from industrial users, while at the same time resulting in a concentration of metal in certain LME locations.

This exacerbates backlogs when material is booked for delivery by industrial or other users of the exchange, putting even more upward pressure on premiums.

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