Alcoa wants timetable on revised rules for metals trading
Artificial backlogs at aluminum warehouses that were blamed for driving up prices for manufacturers and consumers could disappear under new rules issued by the world's leading metals trader.
The London Metal Exchange on Thursday approved changes that would allow warehouses to keep aluminum in storage and off the market for no more than 50 days. Some warehouses were said to store metals for 100 days or longer, a practice that generated higher fees and inflated the cost aluminum users paid.
Experts say backlogs and other market-distorting practices by investment banks and speculators added an estimated 1 to 3 cents to every aluminum bottle or can.
Alcoa Inc., which had criticized LME policies and changes proposed on July 1, commended the exchange and asked for a clear timeline to put into effect “a more transparent system which increases fairness and improves market function.”
Mike Southwood, senior aluminum consultant with London-based CRU Group, said the LME action “is a big step for them, admitting there is a problem.” He called it a “conciliatory solution” that has something in it for both producers like Alcoa and for manufacturers and middle men who purchase metal made into consumer products.
It's too soon to tell what the exact impact will be, he said. Producers like Alcoa are more concerned with pricing and transaction information, basically knowing who is buying, where and the price.
“Both sides came away from this knowing that their concerns were heard and progress was made,” Southwood said. “The biggest takeaway is that warehouse model that has operated the last three years will go away, in my view.”
Mike Hoffman, CEO of Exal Corp. in Youngstown, Ohio, the largest domestic producer of aluminum bottles for lotions, hair spray and energy drinks, said the action will help reduce costs that filter down to consumers and increase the availability of metal.
The exchange operates more than 700 warehouses worldwide, owned by its members. The changes won't go into effect until April 1.
The LME originally targeted warehouses with backlogs of more than 100 days, but reduced that to 50 days to improve delivery times. It said it will work to develop new reports that more clearly show pricing information, and investigate and act to prevent warehouse owners from using market-distorting practices.
“While the feedback we received over the three-month consultation period was varied and at times polarized, we believe that the amended proposal is, on balance, the best solution,” said CEO Garry Jones.
Warehouse owners pay incentives to producers to store metal, building up inventories that generate higher rentals. They still will be able to offer incentives, but not “outrageous” incentives, Southwood said, and the LME will give producers and manufacturers a voice in operations. “But it will take time.”
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or firstname.lastname@example.org.