Warehousing battle between LME & Rusal set to rumble on

The legal battle between the London Metal Exchange and Rusal over warehousing reforms could rumble on for several more months after a British appeals court declined to make a ruling on Wednesday.

The two parties returned to court this week for the first time since March, when the Russian aluminium producer successfully blocked the world’s leading metals bourse from implementing tough rules to tackle long warehouse queues.

But after a two-day hearing, the three-judge panel “reserved judgment” on whether to uphold or overturn the High Court ruling.

If no decision is made by Friday, the matter will only be resolved in October, at the earliest, after the court’s summer recess.

The three-month LME aluminium price rallied on the news on the delayed ruling, rising 2 per cent to $2,022 a tonne.

Queues of 500 days or more to take delivery of aluminium from US and European sheds caused heated debate last year with metal users claiming that prices were being artificially inflated, to consumers’ cost.

Aluminium is used in everything from soft drink cans to car bodies.

In an effort to tackle the logjam, the LME announced a new rule in November that would force warehouses with queues longer than 50 days to load more metal out than they bring in.

But Rusal took legal action to block the reforms, which it said would cause the weak aluminium price to fall further as inventories flooded the market, costing the company “at the very least tens of millions of pounds” and breaching its human rights.

The High Court ruled that the LME’s consultation procedure was “unfair and unlawful”, forcing the exchange to put on the hold the 50-day rule that was supposed to become effective on April 1.

Since then, queues at warehouses owned by subsidiaries of Goldman Sachs in Detroit, and Glencore in Vlissingen, in the Netherlands, have remained stubbornly long.

As a result, aluminium premiums for physical delivery of metal – which are payable on top of the LME price – have stayed close to record highs.

The disconnect between the exchange price of aluminium and the “all-in” cost of the metal has damaged the standing of the LME in the market.

“This delay is not ideal for the LME because it leaves things up in the air,” said Stephen Briggs, base metals analyst at BNP Paribas.

“The pressure is on them to do something about the warehouse problems and they want to get on with it.”

Warehouse owners profit from the long queues because they charge rent.

Metal owners also benefit by taking advantage of the aluminium contango – where prices for future delivery exceed current prices – allowing them to sell the inventory forward for a safe profit.

If the LME loses the appeal, it is likely to launch a new market consultation to tackle the queue problem.