Aluminum prices may soar as London court tosses reforms
Consumers could endure higher prices for products made of aluminium since a London court threw out reforms intended to reduce artificial backlogs that inflated the cost of the metal on the wholesale market.
The decision by the High Court of Justice in London involved mundane commodities exchange rules that governed how long warehouses could store aluminium lots before delivering them to customers.
The London Metal Exchange wanted warehouses that are part of its global network to keep aluminum 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.
Russian aluminum producer Rusal challenged the reform plan as illegal and unfair because it did not consider all alternatives. In a decision on Thursday, the court agreed, dealing a setback to the exchange's plans to reduce the logjams blamed for inflating prices.
The decision was a blow to manufacturers that use the metal in their products, including some sold to consumers, but it was a boost to aluminium producers that stand to benefit from higher prices if warehouses can keep the metal in storage longer.
“Higher prices are good for Alcoa,” said aluminum analyst Lloyd T. O'Carroll of Northcoast Research in Richmond, Va. “For anyone who's been betting for lower prices, the ruling is not good news.”
Shares of Alcoa Inc. surged 6.2 percent, or 73 cents, on Thursday to close at $12.59. The stock hit a 52-week high of $12.68 during the day.
The LME, the world's leading metals trader, had approved the changes to its warehousing rules in November. The reforms, designed to deliver metal more quickly, were to go into effect on April 1. The exchange operates more than 700 warehouses worldwide, owned by its members. Most aluminum is stored in warehouses in Detroit and Vlissingen, Netherlands.
The LME said in a statement it “is disappointed with the outcome of the judicial review, and continues to believe that Rusal's complaint was without merit.” The exchange is consulting legal advice on its options, including an appeal or resuming the reform process, said spokeswoman Miriam Heywood.
Alcoa also had been critical of LME policies and proposed changes.
“Alcoa has argued in its submission to the London Metal Exchange that its consultation process on proposed warehouse rule changes was unfair,” said spokeswoman Monica Orbe. “Alcoa continues to stand behind its submissions to the LME and encourages the exchange to approach any proposed changes with complete procedural fairness.”
Experts said last year that the backlogs and other market-distorting practices by investment banks and speculators added an estimated 1 to 3 cents to every aluminum bottle or can. The premium is based on warehouse inventory levels, time in storage and transportation costs.
The Midwest premium was $408 a metric ton on Wednesday, said Mike Southwood, senior aluminum consultant with London-based CRU Group, up from a range of $200 to $275 last fall. It is about 20 percent of the cash delivery price of about $2,100 for a ton of aluminum ingot.
“That is extremely high for people who buy aluminum and make things out of it, such as MillerCoors or Coke. They will try to pass that on to their consumers,” Southwood said. In addition to cans, it could affect products such as vehicle parts.
The United Kingdom court found that the LME's original reform process and rule change was unfair because it should have pursued alternatives, including banning or capping rents paid by owners of aluminum to owners of LME-approved warehouses, Rusal said in a statement. The exchange “will be required to carry out a fair and lawful process” that addresses those concerns, it said.
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or firstname.lastname@example.org.