Aluminium biggies call for a change in LME warehouse rules

Two of the world’s largest aluminium producers have called for a shake-up of the London Metal Exchange’s warehousing rules, a move that could end a lucrative trading opportunity that has benefited banks and trading houses such as Goldman Sachs and Glencore.

The call will put pressure on Hong Kong Exchanges & Clearing, which in July agreed to buy the LME for £1.4bn, to weigh in on the controversial issue when it takes charge of the exchange later this year.

Long queues to remove aluminium from LME warehouses have sparked angry confrontations between consumers of metal, such as Coca-Cola and General Motors, and warehouse owners, including Goldman, JPMorgan, Glencore and Trafigura.

However, the call from Rusal, the world’s top aluminium producer, and Emirates Aluminium, a large UAE-based group, marks the first time that producers have publicly criticised the LME’s warehousing rules.

Producers have an economic interest in seeing the situation continue, since the long queues have helped to drive the premiums paid for physical aluminium over and above the LME benchmark to record highs.

Vladislav Soloviev, first deputy chief executive of Rusal, added: “The problem is we are in a situation where the LME doesn’t reflect the real market, the supply and demand balance, because a lot of financial players have come to the market. That’s why something should change.”

Banks and trading houses have rushed to buy warehousing companies to profit from the fact that large quantities of metal have become surplus to requirements since the financial crisis. But now that the metal is needed, consumers say, it can take more than a year to be delivered.

The problem is most acute at warehouses owned by Glencore in the Netherlands and Goldman in Detroit. Glencore owns an 8.75 per cent stake in Rusal, and buys a large chunk of its annual production under a long-term supply deal.

Mr Soloviev warned that other exchanges may try to launch competing aluminium contracts to capitalise on the divergence between the price of aluminium on the LME and in the physical market. “Shanghai [the Shanghai Futures Exchange] sooner or later will come to the market. The LME should realise there is competition.”