The London Metal Exchange (LME) is likely to move quickly to implement its tough warehousing rules to cut backlogs if it is successful at an appeal hearing this week, metals market sources said. But even if it loses the appeal case against Russian aluminium giant Rusal, the rules designed to speed up deliveries of metal from depots in the LME's global network are likely to come into force by year's end after another consultation period, the sources said.
At issue are reforms proposed by the LME, originally due to take force in April, to make owners of warehouses deliver out at least as much metal as they take in, but which Rusal fears will unleash supplies onto the market and depress aluminium prices. Industrial buyers of aluminium, used in transport and to make beverage cans, have to wait up to two years to get delivery of metal from some LME warehouses and the new rules aim to cut the queues down to a maximum of 50 days.
The LME, the world's oldest and biggest market for industrial metals, was jolted in March when a judge ruled in favour of Rusal, saying initial consultations on the rule changes had been "unfair and unlawful". The exchange, owned by Hong Kong Exchanges and Clearing Ltd launched an appeal to overturn the ruling and hearings are due on Tuesday and Wednesday.
Lord Justice Jackson of the UK Court of Appeal said in a ruling in May giving the LME permission to seek to overturn the original decision: "In my view the grounds of appeal have a real prospect of success." The LME has drawn up contingency plans whether it wins or loses the case, an industry source said. If it wins, it is likely to give three months notice to warehouse firms of the so-called "load-in/load-out" rule changes, said the source, who declined to be identified.
If it loses, it is expected to launch a new month-long consultation, along with other several other consultations it was already planning on other aspects of its reform programme. "Under this scenario the load-in/load-out rules would probably come into effect towards the end of the year," the source said.
The exchange said in an emailed statement: "The LME will analyse the content of any judgement and will update the market on its proposed way forward as soon as possible afterwards." The loser of the court ruling could seek a further challenge, but the Supreme Court would need to agree and this would not be easy, legal sources said. "In very general terms, the Supreme Court is looking for cases of relatively broad public interest in a legal context, before it will grant permission," said Adam Chapman, partner and head of public law at Kingsley Napley.
"Fewer cases go to the Court of Appeal and fewer still to the Supreme Court." A legal source who declined to be identified said the Supreme Court was less likely to accept an appeal in this case because it focused more on the application of law rather than controversial legal principles. Once implemented, the reforms would have the biggest impact on aluminium at LME-monitored warehouses in the Dutch port of Vlissingen, which hold over 2 million tonnes of the metal and where a backlog of over two years has built up to access metal.
Depots in the US city of Detroit also have queues, but investment bank Goldman Sachs, which owns those facilities, has decided to follow the new LME rules even before they are implemented. "At Vlissingen, there is no indication whatsoever that queue times are falling or overall metal held at warehouses is falling. That is where the LME needs to do something to speed up the process," said Nic Brown, head of commodities research at Natixis.
The decline in backlogs should lead to a pull-back in aluminium premiums, payments levied on top of the cash LME price when buying metal for immediately delivery, analysts said. "In principle, it should eventually bring premiums down, but it might well not happen as quickly as thought," said Stephen Briggs, metals strategist at BNP Paribas.
Premiums have shot to record levels due to a combination of backlogs as well as financing deals backed by aluminium that have kept metal locked away and unavailable to consumers. Earlier this month, Japanese aluminium premiums hit a record at nearly double the levels of two years ago, while European and North American premiums have also hit records.