Winter Park, Florida 09/06/2015 - Alcoa has asked the Commodity Futures Trading Commission (CFTC) for documents that relate to the regulator's level of influence over London Metal Exchange warehousing reforms.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that LME must become an official Foreign Board of Trade (FBOT) in order to give US traders direct access to the exchange's electronic trading and order-matching platform. As part of the application process, the CTFC has significant authority to investigate the LME's trading and warehousing system.
On March 24, the CFTC deferred the LME's FBOT application, citing worries that the exchange has not yet made enough progress in implementing new rules aimed at alleviating multi-year long warehouse queues.
“LME-licensed aluminium warehouses… have caused concerns in the market, particularly with respect to pricing in the US for aluminium, due or related to the length of warehouse queues, particularly in Detroit,” CFTC said.
Over the past several years, US aluminium consumers, such as brewer MillerCoors, have claimed that bank holding companies via their ownership of metal warehouses have taken effective control of the LME, leading to a supply bottleneck and massive unwarranted expenses for consumers in the form of artificially high physical premiums.
Some of the LME's biggest reforms were implemented before the CFTC's March letter. Most notability, on February 1, the exchange rolled out new load in/load out regulations that require warehouses with queues of more than 50 days to deliver out more metal than they take in daily.
But the rules will now become even tougher on warehouses this summer when the decay factor will double to 1.0, meaning that from December 1, an affected warehouse will have to load out at least twice as much metal as it loads in rather than one-and-a-half times as is currently the case.
Alcoa confirmed that it made a Freedom of Information Act request to the CFTC to ascertain just what was communicated to the LME.
"Our goal is to learn the extent to which the CFTC has engaged in substantive discussions with the LME as [the exchange] considered and adopted rule changes that impact the aluminium market in order to influence aluminium pricing," an Alcoa spokesperson said.
"We believe that the CFTC should refrain from any comment or judgment on, or interference with, LME rule changes, and that the CFTC should examine any LME aluminium contract performance issues only through an open, inclusive and transparent process where all affected market participants have the opportunity to present their views," it added.
At this point, Alcoa is just on a fact finding mission. In the documentation provided to FastMarkets, the company did accuse the CFTC of forcing the LME to change its warehousing rules nor did it directly assert that new LME policy is the the primary catalyst behind this year's sharp drop in the LME aluminium price and regional premiums.
Three-month aluminium on the LME is currently trading at $1,749.50 per tonnes, down 16 percent from last November, while the US Midwest premium as fallen to 8-8.5 cents per pound, well below the 24 cent level at the start of the year.