London 26/02/2014 - UC Rusal contends that the new London Metal Exchange warehouse load-out regulations would cause "severe hardship" to aluminium producers, according to its skeleton argument obtained by FastMarkets.
The world’s largest aluminium producer is challenging the LME in a judicial review before London's High Court - its decision is anticipated before the end of March this year.
Under the new LME regulations to be enacted on April 1, all metal loaded into a warehouse over a three-month period is measured. If there is a queue of more than 50 calendar days, the affected warehouse would be expected to deliver out additional metal based on a formula.
"The effect of the decision is likely to be, as the LME has itself acknowledged, an immediate reduction in the global 'all in' price of aluminium, and severe hardship to producers of aluminium... with potential for irreversible damage through smelters being required to close down," Rusal said.
Rusal produced 3.857 million tonnes of aluminium in 2013, a drop of eight percent on the previous year, after it cut output across many of its operations to combat low prices - partly the result of the massive stock overhang.
The aluminium market was in a surplus of 1.102 million tonnes in 2013, the World Bureau of Metal Statistics (WBMS) said earlier this month - a sixth consecutive year of oversupply.
Prices are already deep into the cost curve. The three-month LME contract averaged around $2,000 per tonne in 2012 but this fell to around $1,860 last year. The metal ended at $1,774 per tonne on Wednesday, up $3 on Tuesday's close, after stocks fell 7,775 tonnes to 5,324,350 tonnes and cancelled warrants climbed 36,125 tonnes to 2,492,375 tonnes.
Rusal is challenging the LME along multiple fronts. It alleges that the exchange failed to conduct a sufficient inquiry and did not explore sufficient alternatives. Additionally, the new rules breach Rusal's "human rights" because they interfere with the "peaceful enjoyment of its possessions."
The company also claims that the exchange gave no prior indication that it would lower the queue threshold to 50 days, thereby denying those consulted any opportunity to give "intelligent consideration" to the proposal - the LME's consultation paper originally suggested a 100-day queue threshold.
Rusal said it would file a lawsuit against the LME in December after calling on the exchange in September to postpone the introduction of the new regulations, warning that failure to do so would result in greater confusion and opacity.
Under the new regime, metal will be transferred to off-warrant locations, reducing transparency and restraining warrant liquidity, it said at the time.
While it acknowledged the need for reform to ensure a properly functioning market, it recommended that the LME provide transparent data based on actual warrant holdings and ownership of metal in warehouse queues.
It also suggested the exchange look to expand the LME warehouse network and encourage new, independent operators, while also widening the offering of contracts beyond high grade aluminium and aluminium alloy.
In its full-year financial results statement on Tuesday, Hong Kong Exchange & Clearing (HKEx), the parent company of the LME, reiterated its view that the judicial review from Rusal is without merit and it will contest the judicial review vigorously.
(Editing by Mark Shaw)