New York 23/07/2013 - Bank holding companies via their ownership of metal warehouses have taken effective control of the London Metal Exchange, leading to a supply bottleneck and massive unwarranted expenses for consumers, Tim Weiner, global risk manager with MillerCoors, said in testimony before a US Senate banking committee Tuesday.
Over the past several years, big-name banks and traders have bought warehousing companies. Mergers include Louis Dreyfus/GKE Metal, Glencore/Pacorini, Trafigura/Nems, JP Morgan/Henry Bath, Goldman Sachs/Metro, Noble/Delivery Network, CWT/MRI and Barclays/Metalloyd/Erus Metals.
Because of the overwhelming popularly of metal financing deals, millions of tonnes of metal have piled up in LME sheds, while physical aluminium premiums have spiked to all-time record highs. For example, the US Midwest spot aluminium premium has climbed above 12 cents per pound over the LME price - about double normal historical levels.
“Aluminum prices in general and for can sheet in particular have remained inflated relative to the massive oversupply and record production. What’s supposed to happen under these economic conditions? When supplies rise while demand is flat to down, prices should fall,” Weiner said to the Senate committee.
“Instead, what’s happening is that the aluminium we are purchasing is being held up in warehouses controlled and owned by US bank holding companies, who are members of the LME, and set the rules for their own warehouses. These bank holding companies are slowing the load-out of physical aluminium from these warehouses to ensure that they receive increased rent for an extended period time.”
MillerCoors has been forced to wait as long as 18 months to take physical delivery of aluminium, he added.
“This does not happen with any of the other commodities we purchase. When we buy barley we receive prompt delivery, the same with corn, natural gas and other commodities. It is only with aluminium purchased through the LME that our property is held for an extraordinary period of time, with the penalty of paying additional rent and premiums to the warehouse owners, until we get access to the metal we have purchased,” Weiner said.
“The current system does not work. It has cost MillerCoors tens of millions of dollars in excess premiums over the last several years with no end in sight. My company and others estimate that last year alone, the LME warehouse rules have imposed an additional $3 billion expense on companies that purchase aluminum,” he added.
Additionally, the fact that the bank holding companies that are members of the LME also comprise the LME Warehouse Rules and Regulations committee and also own a number of LME-certified warehouses is unprecedented and represents a clear conflict of interest, Weiner said.
“There's no clear 'regulator' or oversight of the LME warehouses - the LME itself is a self-regulated entity. In addition to direct talks with the LME, both formal and informal, we have urged regulators in the US, the UK and the EU to give thoughtful consideration to the effect of LME business practices on the industries that rely on a supply of aluminum priced by reasonable market conditions,” Weiner said.
Reuters reported yesterday that the CFTC has told some banks and selected traders to preserve any communications related to incentives or other related delivery procedures - although at this stage, the CFTC has not launched a formal probe.
For it's part, the LME hopes to reduce lines by making warehouse companies with sheds where waits exceed 100 days deliver out up to one-and-a-half times more metal than they take in. The exact load-out rate requirements for each warehouse company would be determined over rolling calculation periods and would take effect from May 1, 2014.
The consultation period will last until September 30, with a final decision on whether to implement the changes expected in October.
“There is no reported shortage of aluminium in the market; consumers can continue to buy directly from producers as they always have done,” the LME said in a statement responding the US Senate hearing.
“Since 2010, the LME has brought in a series of proposals to alleviate warehousing queues that have built up in some locations, but we are legally restricted from capping rents and preventing trading companies from owning warehousing companies,” the LME said.
“The LME is a regulator of the market as well as being regulated by the FCA. We are consulting with the metals trade and industry on a proposal to amend the delivery obligations of warehouse companies with long queues,” the exchange added.
However, MillerCoors countered that the proposed LME changes are not sufficient. The company has specifically asked the LME to amend its rules so that daily rental fees can only be charged for a limited 30-45 period following cancellation of a warrant.
“The LME dismissed our proposals. The changes they have made and recently proposed to increase the daily load-out rates are minimal and would seem to make no real impact, but we look forward to submitting comments on their proposed rule changes,” Weiner said.