Bloomberg News

Beer Can Cost Rests on U.K. Aluminum Warehouse Verdict

July 29, 2014

Aluminum stay tab can lids

Global aluminum costs are $6 billion higher because of the long waits, according to Novelis Inc., a manufacturer of rolled aluminum whose customers include Coca-Cola Co. and Dearborn, Michigan-based Ford Motor Co. Photographer: Freya Ingrid Morales/Bloomberg

It’s been a year since the U.S. Senate held a hearing on logjams at metal storage facilities and rising fees. Since then, costs have gone up and waiting times for delivery at some sites are even longer.

The London Metal Exchange, which oversees more than 700 warehouses, has been blocked from easing delays by Moscow-based United Co. Rusal, which as the world’s biggest aluminum producer stands to lose from shorter backlogs. The LME issued a new rule that storage facilities with the longest wait times had to release more metal than they took in. Rusal blocked the measure in a U.K. court, and the exchange is appealing in a case that started in London today.

Wait times to obtain aluminum stretch to almost two years or longer in Detroit and Vlissingen, Netherlands, the two biggest sites for the LME-tracked metal. That’s up from about 15 months a year ago, when U.S. Senator Sherrod Brown, an Ohio Democrat, called on U.S. regulators to force changes in metals warehousing. Instead, higher prices benefited producers including Rusal and New York-based Alcoa Inc. and hurt end-users such as beverage makers.

Rusal “as a producer, is advantaged by the status quo,” said Michael Beloff, a lawyer for the LME, at the start of the appeal hearing. The company is “heavily reliant” on the continuing high level of fees added to benchmark prices, he said.

Aluminum Supply

The issue came to Senator Brown’s attention after companies such as Denver-based brewer MillerCoors LLC complained that LME-authorized warehouse operators including Metro International Trade Services LLC, a unit of Goldman Sachs Group Inc., and Glencore Plc-owned Pacorini Metals were creating artificial limits on aluminum supply. U.S. regulators subpoenaed documents from warehousers including Metro last year. At least 36 lawsuits have been filed against the LME, Goldman Sachs and metal suppliers.

The price of aluminum for delivery in three months on the LME gained 11 percent in the past year to $1,988 a metric ton. Surcharges to obtain the metal in the U.S. and Europe, known as premiums, increased as much as 73 percent.

The backlog for aluminum at depots in Detroit operated by Metro increased to 681 days as of the end of June from 675 at the end of May, according to the LME data. The period at warehouses owned by Pacorini in Vlissingen lengthened to 774 days from 716 in May. Owners of the metal pay storage fees during that time.

The LME’s new “load-in, load-out” rule, slated to have begun in April, would have “little material effect on warehouse queues,” Rusal said yesterday in a statement. The bourse should have explained why it rejected the option of capping rents at backlog-affected warehouses and a consultation on the proposed rules was “clearly unfair,” the company said in its court documents.

Metal Queues

“For the LME to address the problem of aluminum queues, it needs to implement its proposed new delivery-out rules,” said Nic Brown, head of commodity research at Natixis SA in London. “That’s not to say that the new rules would suddenly cure the problem. But you have to start somewhere.”

Global aluminum costs are $6 billion higher because of the long waits, according to Novelis Inc., a manufacturer of rolled aluminum whose customers include Coca-Cola Co. and Dearborn, Michigan-based Ford Motor Co. That’s twice the amount MillerCoors estimated last year.

Just this year, the jump in premiums alone has cost North American consumers an additional $650 million, according to the Beer Institute, a Washington-based industry group.

“Clearly there hasn’t been a very visible regulatory response,” said Nick Madden, chief procurement officer at Atlanta-based Novelis. “This process clearly will take a long time.”

Hub Cities

Lengthy waits for copper, lead and zinc have mostly disappeared in hub cities such as New Orleans; Antwerp, Belgium, and Johor, Malaysia, as inventories have fallen. Even as the court thwarted the LME’s plan to change the warehouse rules, the exchange said it is still watching warehouse metal flows to determine delivery requirements for the eventual introduction of the rule.

The surcharge for obtaining a specific parcel of aluminum in a specific location, which is added to the LME benchmark price, is at 19.75 cents a pound in the U.S. Midwest, compared with 12 cents a year ago, according to Metal Bulletin data. The fee reached a record 20.9 cents in January. The premium in Europe, without import fees, rose to a record $402.50 a ton from $250.

Goldman Sachs has said its Metro unit is up for sale. The bank said last month it started complying with the load-in, load-out rule even after the court blocked the measure.

Higher Costs

Warehouse waits are not the only reason costs are higher. Aluminum producers have curbed output and demand is stronger, helped by carmakers who are switching to the metal as a lighter alternative to steel.

Alcoa (AA:US), the largest U.S. producer, said it will include new language in its quarterly filings with the U.S. Securities and Exchange Commission explaining risks from a potential “flood” of stockpiled aluminum arriving on the market.

The company this month reported better-than-expected second-quarter profit. Shares have gained 112 percent in the last year. Rusal narrowed its net loss in the first quarter on rising premiums and reduced costs. The shares are up 52 percent in the last year.

The LME’s original plan, to require depots that have delays of more than 50 days to deliver more metal than they take in, was derailed March 27 when Rusal won a legal challenge. Judge Stephen Phillips said the LME’s consultation process leading to the new rule was “unfair and unlawful.”

Competition Law

Judge Rupert Jackson, who granted the LME the right to appeal in May, argued that Phillips’s ruling, “if correct, places onerous obligations on any public body conducting a consultation on complex issues in a politically sensitive area,” according to a copy of the order, supplied by the LME. The bourse ruled out capping rents because of concerns it might breach competition law.

There won’t be an immediate impact should the court rule in favor of the LME, according to Natixis. The exchange would have to give warehouse operators some form of grace period before introducing changes, according to Macquarie Group Ltd.

“As they do make changes there are so many opinions, no matter what move they make, if it’s helpful to someone, it’s probably going to be unhelpful to someone else and so they face litigation,” said Madden at Novelis.

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editors responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net Bob Ivry, John Deane


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