Rusal takes London Metal Exchange to court over warehouse rules

Rusal, the aluminium producer controlled by oligarch Oleg Deripaska, is taking the London Metal Exchange to court, claiming a crackdown on the metals warehousing industry is a breach of its “human rights”.

The lossmaking Russian company confirmed that it had filed a judicial review in the UK, demanding proposed rule changes by the LME are overturned.

In response to barrage of criticism about queues of more than a year to withdraw metals from some of its registered warehouses, the LME announced a package of measures in November to tackle the backlog and combat abusive behaviour.

Some consumers have alleged the delays have artificially pushed up prices and led to vast extra costs. But Rusal and other aluminium producers have reacted furiously to the proposed changes amid concerns they will cause the ‘all in’ price of the metal to fall.

They are worried the new rules will lower the premium consumers pay for immediate delivery of metal on top of LME prices. Premiums of more than $200 a tonne have helped offset the decline in prices, caused by oversupply and towering stocks, and kept many aluminium smelters in business.

In its court application, Rusal alleges that the consultation conducted by LME was unfair and procedurally flawed. The metals producer also claimed the changes to the warehousing policy are “irrational and disproportionate” which constituted a breach of Rusal’s human rights. The move to seek a judicial review was revealed by the LME’s parent company, Hong Kong Exchanges and Clearing in a regulatory statement

People familiar with the situation said Rusal was not seeking any financial compensation. Instead, it wants the rule changes quashed and the LME to launch a new consultation process. The case is likely to be heard in February or March in London, just ahead of the planned implementation of the new rules on April 1, the same people added.

The LME said Rusal’s complaints were without merit and it would defend any proceedings “vigorously.”

“Implementation of the proposed changes to the warehousing policy will proceed as announced,” the LME said in a statement. People close to the exchange said it was prepared for a legal challenge and was confident in the robustness of its processes.

The LME wants to force warehouses with queues longer than 50 days to deliver more metal out than they bring in. It has also laid out a range of additional measures to counter “abusive” behaviour by warehouse companies.

Analysts said they were not surprised by Rusal’s move, which is seen as a relatively low cost way of delaying or frustrating the LME’s proposed rule changes.

“Rusal has a vested interest in keeping premiums high,” said one market watcher, adding the “irony here is that premiums haven’t fallen since the LME announced the rule changes.”

On Tuesday, aluminium for delivery in three months times on the LME was trading around $1,750, close to a four year low. However, duty paid aluminium premiums in Europe have risen steadily since late October, reaching a high of $250-$275 a tonne in Rotterdam earlier this month, according to Reuters. Around 12m tonnes of aluminium is thought to be sitting in LME and non-LME warehouses.

Analysts estimates around a third of the aluminium smelting industry is currently losing money. In response, producers have started to curtail output but the cuts have been too slow to balance the market, which is facing hefty increases in production from China and low-cost producers in the Middle East.