The London Metal Exchange (LME) has been in court with Russia-based aluminum manufacturer United Co. Rusal PLC since December, due to Rusal’s opposition over a new set of rules LME is introducing that will alleviate bottlenecks at metals warehouses. A lower court ruled in favor of Rusal in May; the suit was then brought to the UK Court of Appeal, which ruled in favor of the LME. The LME is now set to enact its new rules on February 1, 2015.
Recently, metals warehouses — such as those owned by JPMorgan and Goldman Sachs in the US — have been under heavy fire because of backlogged inventory. Many claimed that by creating bottlenecks and backlogging inventory, warehouses were making a profit from extending the rent that manufacturers and metal owners pay to store metal. In 2013, a case was brought against the Wall Street banks, accusing them of purposely creating a traffic jam in the warehouses. The suit was dropped this past summer, though the warehouses will continue to be surveilled by regulatory commissions, such as the US Department of Justice and Commodity Futures Trading Commission.
Metal warehouses, like the ones that JPMorgan and Goldamn Sachs own, are part of an international network of LME warehouses. Sometimes aluminum orders were so backlogged that customers waited two years to be sent their aluminum. Others have had to spend additional money on premiums to obtain their orders faster.
Last summer, in an attempt to decrease backlogs, the LME proposed new guidelines that allowed warehouses that had bottlenecks of over 50 days to send out more aluminum than they accepted until the bottlenecks were minimized.
After the LME’s initial proposal, Rusal protested, claiming that the new guidelines would financially hurt the company. But now, since the Court of Appeal overturned the lower court’s decision, bottlenecked LME warehouses are already increasing their number of shipments. The Court of Appeal fined Rusal and has banned the company from appealing; however, Rusal still plans to file an appeal with the UK’s Supreme Court.
The original intent of the LME was to provide a forum to balance global and regional aluminum supply and demand, and inventory management. However, the LME has taken new unwanted dimensions — accelerating volatility in the global aluminum market leading to more speculation as opposed to manufacturing actions.
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Developed and Written by Dr. Subodh Das and Tara Mahadevan
October 8, 2014
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