Big warehouse owners, under regulatory scrutiny for tying up huge amounts of aluminium in profitable storage, are unlikely to risk seeking a fresh influx of metal even though a UK court ruling last week set back attempts to rein them in.
But access to aluminium will remain tight as existing backlogs increase in the global network of warehouses overseen by the London Metal Exchange (LME) following the court decision, analysts and industry sources said.
The High Court ruled in favour of Russian aluminium producer Rusal, halting new LME rules aimed at making owners of warehouses deliver metal more quickly to consumers such as makers of vehicles and drinks cans.
Big banks and trade houses that own warehouses and charge rent have profited from letting long queues build up for buyers to withdraw metal. Some also keep huge stocks of aluminium tied up, unavailable to manufacturers, in long-term financing deals.
Rusal, fearing that the new restrictions would undermine aluminium prices, successfully argued that the LME’s consultation with stakeholders on its action had been flawed.
But the LME, the world’s largest marketplace for industrial metals also including copper, zinc and nickel, is likely to prevail eventually, even if this means repeating the consultations in a way that addresses the court’s concerns.
“I think the warehouse operators will be a little cautious in suddenly saying that’s the end of that,” said analyst Grant Sporre at Deutsche Bank.
“There will be another round of consultations and there will be some form of some restrictive ruling that disincentivises the warehouse operators to build these queues.”
The court ruling last Thursday halted only one reform, which would have forced depot operators to deliver more metal out than they took in. A raft of other new measures remain in place.
The LME, which is owned by Hong Kong Exchanges and Clearing , has taken on new powers to root out market abuse. These include probing whether warehouses are intentionally creating lucrative backlogs by offering high incentive payments for arrivals of new quantities of metal.
“They (warehouse companies) are on notice that they’re going to be monitored a lot more closely by the authorities,” said metals strategist Robin Bhar at Societe Generale.
The court ruling has come as a blow not only for metals consumers - it has disappointed smaller warehouse operators who had expected the LME’s new rules on queues to benefit them after years of dominance by big groups such as Goldman Sachs and Glencore Xstrata.
Hans Cleton, managing director of Dutch warehouse firm Independent Commodities Logistics, said he had agreements in place with clients who planned to store material with his company once they have withdrawn it from larger firms.
Now that the court ruling means LME regulations will not yet force faster delivery out of facilities owned by big players, his firm was having to discuss new schedules with the clients.
“Although the problem is multi-fold…we just need to be patient,” he said, adding he expected metal to enter his empty warehouses in Moerdijk, a new LME location, later this year.
Without the new LME regulations - which were designed to cut backlogs to 50 days from over a year in some cases - such delays will continue to restrict access to physical metal.
In the days following the court judgment, LME data showed a series of large fresh “cancellations” in aluminium - owners of metal in warehouses giving notice they want to take delivery - although some traders said this may not be directly related to the legal decision.
Cancelled material is shunted to the back of queues, extending the wait times.
At Vlissingen, the Dutch warehouse location with the most aluminium and the longest backlogs, there have been 211,150 tonnes of fresh cancellations since the court ruling, extending queues by more than two months to a record two years.
Availability of aluminium is also difficult due to financing deals which have tied up huge amounts of metal in warehouses based on selling forward the metal at a profit and storing it ahead of delivery.
“I know a couple of warehouses that have done (financing) deals to 2015,” said a trader who specialises in warrants, the ownership documents for LME metals in warehouses.
While financing deals are still attractive because of the forward curve in aluminium prices, there could be a slowdown due to other factors.
Earlier this week, Rusal marketing and sales director Steve Hodgson told a conference call he had heard that some financing deals were not being rolled over, but did not give details.
Sporre said this may be linked to big banks reducing their commodities exposure and smaller parties who might take over some of the deals being restricted due to the limited size of their balance sheets.
“As a general trend, I would expect some of these financing deals to unwind or not as many to be rolled over as previously,” Sporre said.
In the latest sign of the trend among big banks away from commodities, JP Morgan said last month it was selling its physical commodity business to Swiss trading house Mercuria.
February 19, 2015
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