Orlando, Florida 27/02/2014 - The London Metal Exchange has fired back at UC Rusal, claiming that its new load-out regulations were devised via a rational, prudent and considered process, lawyer Michael Beloff wrote on Thursday in the LME's skeleton argument.
Rusal, the world’s largest aluminium producer, is challenging the LME in a judicial review before London's High Court. It alleges that the new LME warehouse rules could create a "severe hardship" for producers by artificially depressing the 'all in' price of aluminium.
Under the 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.
Rusal believes that the LME failed to conduct a sufficient inquiry and did not adequately explore alternatives. Additionally, it alleged that 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.
But the LME's lawyer countered that Rusal is simply attempting to reopen the consultation process so it can advocate for its preferred solution of banning or capping rent that warehouse operators can charge for metal in queues.
The LME contends that it did consider alternatives, including those made by Rusal and other major producers.
"Indeed Rusal made such representations both in writing and during two face to face meetings," the court documents said. "During those meetings, Rusal discussed many of these issues that it now says it was unaware of, in particular the fact that the queue threshold might change and the feasibility of capping the rent charged by warehouses when metal was held in queue."
"The LME conducted a fair consultation which afforded consultees, including Rusal, an opportunity to make intelligent representations," Beloff argued.
But the LME ultimately decided that it had "good, valid, and sufficient reasons" for not adopting Rusal's preferred solution, noting several serious practical and legal impediments to such an approach.
"Therefore, Rusal's current primary contention is groundless," Beloff stated.
For example, the banning of rents in queues could be construed as an imposition on the right of metal owners to enter into contracts on agreed terms with warehouse owners, the LME said.
Also, this approach might have unintended consequences such as the possibility that warehouses may increase their FOT charges to compensate for the loss of rent from queues, it added.
Lastly, the LME said that it would "suffer serious reputational damage" if it were to void the announced rules and restart the consultation process, especially at a time when the LME is facing increasingly significant competition from other exchanges.
This is probably a direct reference to the CME Group, which is finalising specifications for its own physically delivered aluminium contract and is currently in talks with prospective warehouse operators.
"Delay to the implementation of the proposal would prevent the LME from taking action necessary to maintain an orderly market and would be detrimental to the market as a whole," the LME said.
(Editing by Mark Shaw)