September 1, 2014 / 4:41 PM / 3 years ago

U.S. case dismissal won't dim regulatory glare for base metals sector

* Legal, regulatory spotlight on metals to remain

* U.S. politicians keep up pressure for more probes

* Backlogs at metals warehouses up to 2 years

By Melanie Burton and Eric Onstad

SYDNEY/LONDON, Sept 1 (Reuters) - Industrial metals will stay in sharp regulatory focus, even though a U.S. judge dismissed a high-profile case claiming that Wall Street banks and commodity merchants artificially inflated aluminium prices by restricting supply.

Users of the metal who launched the case are facing continued headaches about supplies as the warehouse backlogs they complained about are still largely in place, while sky-high surcharges remain for those wanting material immediately.

The dismissal on Friday of an antitrust case was welcomed by Goldman Sachs Group Inc, Glencore Plc and other parties to the suit, but it is not expected to mark an end to the legal and regulatory spotlight on industrial metals trading and storage.

“They may come up against more regulatory scrutiny,” Societe Generale metals analyst Robin Bhar said.

“That’s why the banks have put their physical assets up for sale, because they don’t want that scrutiny that the Fed, the Senate, the EU and the UK seems to be throwing on aluminium in particular but other metals as well.”

In May, Goldman Sachs launched a formal process to sell its Metro metals warehousing business and in March JPMorgan sold its physical commodities unit to Mercuria for $3.5 billion.

A key U.S. politician said last month that he would press on with a campaign to pressure the Federal Reserve to take Wall Street traders to task for gaming commodity markets.

Other U.S. legislators want regulator the Commodity Futures Trading Commission to carry out a review of metals warehousing while a UK court case regarding the issue has not been resolved

The case thrown out last week was the highest profile legal action to rock the base metals market and the London Metal Exchange (LME) in almost two decades.

More than two dozen small aluminium fabricators alleged the defendants had colluded since May 2009 by hoarding metal in warehouses, driving up prices of industrial products from soft drink cans to airplanes.

But a judge in a Manhattan court ruled there was no indication the defendants intended to manipulate prices, though it was clear their actions affected the aluminium marketplace.


Analysts said the ruling would also do little to deter the record rise of premiums, a surcharge that consumers pay on top of futures prices to obtain metal.

“It’s going to be high or higher premiums for the foreseeable future - not great news for consumers,” said commodity analyst Daniel Hynes of ANZ Bank in Sydney.

Rusal, the world’s biggest aluminium producer, kicked off talks with Japanese buyers at a record high premium of $460 per tonne for October-December shipments of the metal, according to three sources.

Relief for consumers could still come with a new LME regulation that is designed to unclog warehouse queues but that is also stuck in a quagmire of legal action with movement unlikely before October.

Even if the LME imposes new rules, designed to force warehouses to deliver out at least as much metal as they take in, backlogs will only come down gradually, analysts say.

The queue to access metal at LME approved warehouses in the Dutch port of Vlissingen was over two years or 743 calendar days, according to the latest LME data.

Meanwhile, the LME market is showing ever more severe signs of stress due to a lack of available spot supply.

Cash aluminium prices last week traded at a premium to the benchmark three month contract for the first time since December 2012. CMAL0-3

This comes even though some five million tonnes of metal are locked up in LME warehouses, mostly in the U.S. automotive hub of Detroit and in Vlissingen.

Another five or so million is thought to be held off exchange, nearly one quarter of a year’s supply. (Reporting by Melanie Burton and Eric Onstad; Editing by Veronica Brown and David Evans)

Our Standards:The Thomson Reuters Trust Principles.
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