London 25/09/2013 - UC Rusal has called on London Metal Exchange (LME) to postpone its proposed changes to its warehouse regulations, warning of greater confusion and opacity if it does not consider alternative measures.
The LME is currently consulting its users on proposed changes to its regulations aimed at freeing up metal caught up in long queues.
The proposed new rules would mean that warehouse companies with sheds where waits exceed 100 days deliver out up to one-and-a-half times more metal than they take in. A decision from the LME board is expected in October.
But Rusal is concerned that the proposed measures risk disrupting the aluminium market further rather than addressing issues that have emerged since 2008.
These measures will lead to a less transparent market place and diminished relevance of the exchange for industrial users, the global aluminium producer warned in a statement on Wednesday.
“Simply put, the argument underlying the Hong Kong Exchange & Clearing (HKEx) proposed rule change has not been clearly stated nor supported with exchange data,” CEO Oleg Deripaska said.
“Instead, the intent of the HKEx to accelerate the transfer into the market of an additional two million tonnes of aluminium, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to,” he added.
Since exchange users are unable to see the ownership of cancelled warrants, there is no way to establish who will benefit from the new rules. Rusal believes metal will be transferred to off-warrant locations, adding to the opacity over the physical balance in the market and reducing liquidity in warrants.
It acknowledged the need for the LME to reform and evolve to ensure a properly functioning market and believes that the key enabler in that transformation is the provision of transparent data that will enhance the price discovery process for consumers, producers, traders and financial participants alike, it said.
Rusal suggested postponing the current proposed rule change pending industry consultation based on actual warrant holdings and ownership of metal in warehouse queues. It also recommended expanding the network of LME warehouses and encouraging new, independent operators, especially in the most liquid locations.
It called on the LME to follow the CFTC’s lead by providing “appropriate access to its existing futures transaction data relating to market participants”, widening the range of contracts beyond high grade aluminium and aluminium alloy and creating “a mechanism for all-in price hedging that enables market participants to manage their regional premium exposures”.
“When taken together, these measures will position the HKEx as a force for change both within the LME and in base metals trading generally, for the good of all industry participants,” Rusal said.
“Through improved transparency in the price setting process, confidence in the LME will be enhanced and with it, its ability to expand beyond its traditional boundaries,” it added.
(Editing by Mark Shaw)