February 20, 2014 / 4:16 PM / 4 years ago

Russia's Rusal fights metal exchange reforms citing human rights

* Rusal challenges LME changes on human rights, other grounds

* LME will defend any judicial proceedings “vigorously”

* LME could be forced to revisit consultation

* Hearing scheduled for Feb. 26-27

By Susan Thomas

LONDON, Feb 20 (Reuters) - The London Metal Exchange (LME) risks having to repeat arduous preparations it made for reform of its global warehouse system if Russian aluminium giant Rusal wins a British judicial review on grounds including human rights.

United Company Rusal, the world’s largest producer of the metal, will seek court permission next week for the review, in hopes of quashing LME moves that may undermine the price at which it sells its products.

The Hong Kong-listed company argues that the LME actions will harm its economic interests and that there were flaws in the consultation and inquiry process adopted by the exchange.

“Rusal is seeking to protect its financial position,” said Igor Lebedinets, an analyst at VTB Capital in Moscow.

If the review goes ahead and finds in Rusal’s favour, the world’s largest marketplace for base metals could be forced to repeat a months-long consultation that split its stakeholders, pitting warehouse owners against industrial companies.

“Normally a judicial review is about a decision-making process,” said Adam Chapman, a partner and head of public law at Kingsley Napley. “A typical outcome is for the decision maker to go back and make the decision again. The judgment is legally binding subject to appeal.”

The application hearing, scheduled for Feb. 26-27, will be the first legal hurdle confronting the LME over the reforms, which are due to take effect in April. The exchange is also facing lawsuits filed by U.S. manufacturers.

The LME, owned by Hong Kong Exchanges and Clearing , oversees warehouses around the world where companies that buy metals such as aluminium or copper on its futures market can take delivery of quality-assured supplies if needed.

Big banks and traders that own warehouses and charge rent have profited from letting long queues build up for buyers to withdraw metal. Some also keep huge stocks of aluminium tied up, unavailable to manufacturers, in long-term financing deals.

The new regulations aim to cut queues and raise loading-out rates at warehouses with big log-jams while fending off criticism from end users like Novelis, which supplies metal to Coca Cola and brewer MillerCoors about inflated prices and distorted supplies.

Producers, squeezed by high energy prices and facing a flood of Chinese capacity, say the changes could remove underpinning from aluminum prices depressed by a global glut of metal that over years has built up record-high stockpiles.

Since early November cash LME prices have been under $1,800 per tonne, which is close to or below break-even for a big portion of global capacity.

“There is a structural problem of oversupply, which China is not doing its share in addressing, and that means a company like Rusal is under real pressure,” said a London analyst.

“So they will do anything they can to increase their revenues, including going to court to try and stop these LME changes,” added the analyst, who declined to be named.

Rusal, which posted a recurring net loss of $132 million in the third quarter, fears the changes will lower premiums which consumers pay on top of LME cash prices for immediate delivery.

Aluminum premiums shot to record highs in January but they are volatile and likely to fall over the longer term.

“It’s still a very vulnerable situation. Rusal knows they can’t rely on premiums being at these levels forever, it’s not a good business plan to assume that,” the London analyst said.


Rusal is challenging the LME’s decision on three grounds, a source close to the company said.

It believes the LME’s consultation process was procedurally flawed, it failed to undertake a sufficient inquiry, and the decision amounted to a breach of Rusal’s rights under the European Convention on Human Rights, the source said.

The convention gives every person, including companies, the right to the peaceful enjoyment of its possessions. Economic interests and goodwill associated with a business are regarded as falling within the definition of possessions.

The source said Rusal held that the LME’s decision would interfere with Rusal’s economic interests in that it would have a direct impact on the price at which it can sell its products.

The LME said it considers the grounds of Rusal’s complaint as without merit and it will defend any judicial review proceedings vigorously.

“Implementation of the proposed changes to the warehousing policy will proceed as announced,” it said.

Initially the judge must decide whether to permit a review.

“In principle at this stage all a judge has to determine is whether there is an arguable case to go ahead. It doesn’t have to be a very strong case, just arguable. It’s a threshold that is meant to be quite low,” Kingsley Napley’s Chapman said.

“In practice it’s not always that straightforward and some judges will take a view that, even though a case is ‘arguable’ it’s never going to win and so they refuse permission.”

Chapman said it was relatively rare for a company to seek a review on the grounds of human rights.

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