* Warehouses not likely to exploit court decision
* Access to aluminium remains difficult as backlogs lengthen
* Queues extend to 2 years at most backlogged warehouse
By Eric Onstad
LONDON, April 3 Big warehouse owners, under
regulatory scrutiny for tying up huge amounts of aluminium in
profitable storage, are unlikely to risk seeking a fresh influx
of metal even though a UK court ruling last week set back
attempts to rein them in.
But access to aluminium will remain tight as existing
backlogs increase in the global network of warehouses overseen
by the London Metal Exchange (LME) following the court decision,
analysts and industry sources said.
The High Court ruled in favour of Russian aluminium producer
Rusal, halting new LME rules aimed at making owners of
warehouses deliver metal more quickly to consumers such as
makers of vehicles and drinks cans.
Big banks and trade houses that own warehouses and charge
rent have profited from letting long queues build up for buyers
to withdraw metal. Some also keep huge stocks of aluminium tied
up, unavailable to manufacturers, in long-term financing deals.
Rusal, fearing that the new restrictions would undermine
aluminium prices, successfully argued that the LME's
consultation with stakeholders on its action had been flawed.
But the LME, the world's largest marketplace for industrial
metals also including copper, zinc and nickel, is likely to
prevail eventually, even if this means repeating the
consultations in a way that addresses the court's concerns.
"I think the warehouse operators will be a little cautious
in suddenly saying that's the end of that," said analyst Grant
Sporre at Deutsche Bank.
"There will be another round of consultations and there will
be some form of some restrictive ruling that disincentivises the
warehouse operators to build these queues."
The court ruling last Thursday halted only one reform, which
would have forced depot operators to deliver more metal out than
they took in. A raft of other new measures remain in place.
The LME, which is owned by Hong Kong Exchanges and Clearing
, has taken on new powers to root out market abuse.
These include probing whether warehouses are intentionally
creating lucrative backlogs by offering high incentive payments
for arrivals of new quantities of metal.
"They (warehouse companies) are on notice that they're going
to be monitored a lot more closely by the authorities," said
metals strategist Robin Bhar at Societe Generale.
The court ruling has come as a blow not only for metals
consumers - it has disappointed smaller warehouse operators who
had expected the LME's new rules on queues to benefit them after
years of dominance by big groups such as Goldman Sachs
and Glencore Xstrata.
Hans Cleton, managing director of Dutch warehouse firm
Independent Commodities Logistics, said he had agreements in
place with clients who planned to store material with his
company once they have withdrawn it from larger firms.
Now that the court ruling means LME regulations will not yet
force faster delivery out of facilities owned by big players,
his firm was having to discuss new schedules with the clients.
"Although the problem is multi-fold...we just need to be
patient," he said, adding he expected metal to enter his empty
warehouses in Moerdijk, a new LME location, later this year.
Without the new LME regulations - which were designed to cut
backlogs to 50 days from over a year in some cases - such delays
will continue to restrict access to physical metal.
In the days following the court judgment, LME data showed a
series of large fresh "cancellations" in aluminium - owners of
metal in warehouses giving notice they want to take delivery -
although some traders said this may not be directly related to
the legal decision.
Cancelled material is shunted to the back of queues,
extending the wait times.
At Vlissingen, the Dutch warehouse location with the most
aluminium and the longest backlogs, there have been 211,150
tonnes of fresh cancellations since the court ruling, extending
queues by more than two months to a record two years.
Availability of aluminium is also difficult due to financing
deals which have tied up huge amounts of metal in warehouses
based on selling forward the metal at a profit and storing it
ahead of delivery.
"I know a couple of warehouses that have done (financing)
deals to 2015," said a trader who specialises in warrants, the
ownership documents for LME metals in warehouses.
While financing deals are still attractive because of the
forward curve in aluminium prices, there could be a slowdown due
to other factors.
Earlier this week, Rusal marketing and sales director Steve
Hodgson told a conference call he had heard that some financing
deals were not being rolled over, but did not give details.
Sporre said this may be linked to big banks reducing their
commodities exposure and smaller parties who might take over
some of the deals being restricted due to the limited size of
their balance sheets.
"As a general trend, I would expect some of these financing
deals to unwind or not as many to be rolled over as previously,"
In the latest sign of the trend among big banks away from
commodities, JP Morgan said last month it was selling
its physical commodity business to Swiss trading house Mercuria.
(Reporting by Eric Onstad; Editing by Anthony Barker)