Rusal makes a submission to LME on proposed rule change

Rusal has made a submission to the London Metal Exchange (LME) Board of Directors on the proposed LME warehouse rule changes. In its submission Rusal asks the LME to postpone the introduction of the proposed rule changes and presents a set of alternative measures for the benefit of all industry participants.

Rusal acknowledges the need for the LME to reform and evolve to ensure a properly functioning market. Rusal 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.

Rusal is concerned that a set of measures the HKEx, as the owner of LME, has proposed risk creating further aluminium market distortions rather than addressing features that have emerged since 2008. The Company believes that these measures will lead to a less transparent market place and diminished relevance of the exchange for industrial users.

Commenting on the proposed changes, Rusal CEO Oleg Deripaska said, “The HKEx is addressing a poorly justified metal availability issue, the timing of which follows a 12-month period when aluminium deliveries from the LME’s warehouses were equivalent to 5% of global annual consumption. Simply put, the argument underlying the HKEx proposed rule change has not been clearly stated nor supported with Exchange data. Instead, the intent of the HKEx to accelerate the transfer into the market of an additional 2 million tonnes of aluminium, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to.”

“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. In all likelihood, Rusal believes metal will simply be transferred to off-warrant locations, adding to the opacity surrounding the physical balance in the market and at the same time reducing liquidity in warrants.”

In its submission, Rusal has set out its case for this assessment, and has outlined alternative measures to rapidly and effectively address those concerns for the benefit of all industry participants. These measures are as follows:

a. Postpone the current proposed rule change pending industry consultation based on actual warrant holdings and ownership of metal in warehouse queues;
b. Expand the network of LME warehouses and encourage the introduction of new, independent operators, especially in the most liquid locations;
c. Building on the disclosure requirements applied by CFTC in the USA as a minimum, the LME needs to provide appropriate access to its existing futures transaction data relating to market participants;
d. Evolve the suite of exchange traded aluminium contracts beyond High Grade and Aluminium Alloy;
e. Provide a mechanism for all-in price hedging that enables market participants to manage their regional premium exposures for commodity transactions.

Rusal believes that, 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. 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.