By Dow Jones Business News, September 11, 2013, 03:25:00 PM EDT
Alcoa Inc. ( AA ) told the London Metal Exchange its plan to ease logjams in its warehouse network would harm the
aluminum industry, joining large metal users in criticizing the exchange's proposal to overhaul its rules.
The LME, the world's main trading venue for industrial metals, in July announced new regulations aimed at cutting the
wait time to get metal from warehouses licensed by the exchange. Companies like Coca-Cola Co. (KO) and aluminum products
giant Novelis Inc. have complained since 2011 that bottlenecks were inflating the cost of metal.
In a letter sent to the LME on Tuesday, Alcoa, the largest U.S. aluminum producer, said the exchange's recommendations
"constitute a major market intervention" that "will do nothing to help our customers."
"The proposed changes to the LME warehousing rules are trying to solve a non-existent metal availability problem,"
Alcoa Chairman and Chief Executive Klaus Kleinfeld said in a statement on Wednesday.
Under the new rules, warehouses with long waits for delivery would have to deliver more metal than they take in. This
would deal a blow to a trade that's sprung up in the last three years, where warehouse owners offer cash and other
incentives to draw supplies into their sheds. They then limit the amount they deliver out, which traders and analysts
say drives up prices for customers who need metal immediately.
Alcoa's letter is the latest sign that the LME has few allies as it prepares to make a final decision in October on
whether to go ahead with or modify the new rules. In a letter sent to the exchange on Monday, trade groups representing
beer and soft drink makers said the exchange isn't going far enough. They said the changes would still leave the
warehouse system susceptible to excessive waits for delivery and artificially high prices.
Meanwhile, the Commodity Futures Trading Commission and the Justice Department have launched investigations into the
LME warehouse system, with an eye on whether warehouse owners inflated aluminum costs, people familiar with the matter
In its letter, Alcoa said aluminum prices--including delivery costs--are at a four year low, evidence that warehouses
are not creating a shortage.
"Consumers are still able to access primary aluminum at a cost equivalent to that seen in mid-2009, when global
markets were just coming out of recession," Alcoa said.
Metal consumers argue that their expenses would be even lower if metal moved more smoothly in and out of warehouses. A
MillerCoors LLC executive told a U.S. Senate committee in July that aluminum users paid $3 billion more last year in
delivery fees than they would have without the warehouse bottleneck. These fees, known as premiums, hit record highs in
the last year in the U.S., Europe and Japan.
While Alcoa doesn't operate LME warehouses, it may stand to lose if the current system is altered. High delivery costs
helped cushion Alcoa and other aluminum makers during years of low prices. A Bank of America-Merrill Lynch analysis in
July estimated that the high delivery fees resulting in part from warehouse payouts kept about 30% of global aluminum
smelting capacity from slipping into the red.
Alcoa says the new rule may spur those interested in storing aluminum to move their metal to warehouses outside of the
LME system, making it harder to track global supplies and potentially threatening the exchange's status as the world's
main aluminum trading hub. Alcoa joined the aluminum beverage makers' groups in asking the LME to release more-detailed
Alcoa also recommended that the LME launch futures contracts tied to regional aluminum delivery fees to allow buyers
to lock in their costs in advance.
Write to Matt Day at firstname.lastname@example.org
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