Major aluminum producer shares fall on LME warehouse rules

Shares of major aluminum producers tumbled on Thursday, as investors anticipated that new London Metal Exchange warehouse rules could depress aluminum prices.

Alcoa Inc., the largest U.S. producer fell 7.5% in afternoon trading. Shares of United Co. Rusal, based in Russia and the largest aluminum maker in the world, fell 2.9% on the Hong Kong Stock Exchange.

The LME, the world's largest metals exchange, on Thursday announced final rules designed to speed the delivery of metal out of its global warehousing network. Metal users like Coca-Cola Co. and MillerCoors LLC have complained that bottlenecks to retrieve aluminum from warehouses overseen by the LME were inflating their costs.

The LME's rule would essentially force warehouses that are home to long waits for metal to deliver out more metal than they take in. That, analysts say, could speed the flow of aluminum out of warehouses and pressure prices lower.

Benchmark aluminum futures on the LME were flat on Thursday, trading around $1,822 a metric ton, down 5% from a year earlier and below the level much of the world's aluminum production requires to break even.

"Aluminum-producer equities are reacting to the more-onerous rule changes unveiled by the LME today," says Jorge Beristain, an analyst with Deutsche Bank.

Alcoa executives, hosting an investor day in Cleveland, played down the impact of the LME rule change on Alcoa. "The issue is very complex and in-depth," Timothy Reyes, president of Alcoa Materials Management, told a crowd of investors, analysts and reporters. Mr. Reyes praised the portions of the new rules that addressed transparency. The LME said Thursday it is considering releasing trade data in a manner similar to that used by U.S. futures exchanges. In an interview, CEO Klaus Kleinfeld blamed the fall on "confusion in the market" and other factors such as the European Central Bank lowering interest rates.

He said the company "is not today delinked from the LME, but we are reducing the impact the metal price has on us" by cutting smelting costs and making more money on value-added products like trucks wheels and fasteners for airplanes.

The company points to growth in a cluster of niche businesses that produce a range of specialty products—from truck wheels to fasteners for airplanes and hurricane-proof walls—which generated $263 million in profits on sales of $3.2 billion in the third quarter, and 79% of earnings in the first nine months came from such-value added businesses.

Mr. Kleinfeld predicted these business would lead to a recovery in Alcoa's share price. "We are hearing that market participants are starting to understand our message," he said.

Alcoa officials also told their audience that supply will fall short of demand in the 49.5 million-ton global aluminum market this year, which they said would grow by 7% in 2013.

Of all the metal stored in LME warehouses, aluminum makes up the largest share. The LME's global warehouse network holds 5.3 million tons of aluminum, equivalent to roughly 11% of annual global aluminum demand.

The LME's original proposal, released in July, would apply increased metal-release requirements to warehouses home to waits of more than 100 days for metal. Its final decision released on Thursday changed that requirement to warehouses with waits of more than 50 days.

"Now they've come out with a target of 50 days, implying more aggressive destocking ahead," Mr. Beristain said.

Any "destocking," or whittling down of inventories, would increase the supply of aluminum available to the market and weigh on prices.

An Alcoa spokeswoman said the company was reviewing the LME's decision.

Century Aluminum Co, of Chicago, fell 8.8%. Noranda Aluminum Holding Corp. , based in Tennessee, fell 1.7%.