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08 January 2014

Human Rights and Metal Warehousing

Over the years of its existence, the LME has been involved in plenty of legal controversy – the Tin Crisis, for example, or the Sumitomo Affair, just in my time – but I suspect that December 2013 marks the first time it has been accused of breaching the rights of one of its users under the European Convention on Human Rights. Now, it is of course possible to see the ECHR as a catch-all device beloved of some parts of the political spectrum and loathed by others, but this is not the place for that debate, beyond perhaps raising one’s eyebrows to the concept that delivering metal to a warehouse is a human right. O tempora, o mores.

Rusal's Dilemma

Without getting into the legal arguments, though, you can see where Rusal are coming from. Faced with a market in over-supply, and with a huge stock overhang and low prices, they have effectively two routes to follow to try and secure the best possible result for themselves. The first is to cut production, to address the over-supply; well, they have done some of that, although not perhaps as much as they suggested they would. The other alternative is to deliver metal not required by consumers into LME warehouse and receive the incentive payment for it, which is a way of ameliorating the current low price for metal; they’ve been doing some of that, too.

Rule Changes

Now, we all know that the warehousing issue was addressed by the LME Board during the last year, and that the originally proposed 100-day queue limit was changed when the final new rule was published to a limit of 50 days. It is that change, as far as I can tell from the reports, that Rusal wishes to challenge through judicial review, on the basis that that warehouse policy breaches its right to the peaceful enjoyment of its possessions, economic interest being included as a possession. Rusal also appear to claim that the consultation process was nothing of the sort, and that the decision to change the rules was effectively already decided, without any heed to the consultation process. There’s a strange argument in there, though; one of the claims is that the LME’s decision on this will have a direct influence on the price at which Rusal can sell its product. Well, yes, that’s true; Rusal has for many years sold its metal on the basis of the LME price. It can’t, therefore, logically be the underlying price that they are disturbed about (because they have been using it for years), but the premium, and the argument is that the premium is determined by the warehouse incentive which is in turn – apparently – a function of the length of queue.

Let’s imagine another plausible lawsuit. If the enjoyment of one’s possessions is a right under the European Convention, then how long can it be before a buyer of LME aluminium claims that its rights under that same convention are being infringed because the warehouse queue is preventing it from taking delivery (and thus enjoying the benefits) of the metal it has legitimately bought as LME ‘cash’ – in other words, available in two days? That would seem to be just as valid an argument. Both sides of the trade – sellers into an LME warehouse and buyers from it – appear to have legitimate reasons to feel aggrieved, either with the status quo or with the proposed changes.

Change of Argument

It’s easy to understand the frustration on both sides, as well. Sure, you could argue (as I frequently have) that the producers should have cut sooner and quicker, but in the end, it’s their decision. Likewise, consumers could accept that the overall price at the moment is in reality low; but, they know the economics of their own businesses better than I do. The party whose position in this is changing is in fact the LME. In the past, they held firmly to the line that the queues were building up as a result of economic circumstances outside their control – a prolonged period of ultra-low interest rates and an excess of metal inexorably leads to the finance trade which underpins the warehouse queues. Effectively, they were saying, “It’s not our fault, guv, we don’t control interest rates or the growth of economic (as opposed to financial) activity. It’ll all be OK when global demand causes rates to rise and the excess metal to be consumed”. That was a defensible argument; it may not have been popular, but it was relatively robust. Now, though, lots of issues are opening up, and that defence has been abandoned, since if the LME themselves accept the need to make the new rule changes, they are implicitly also accepting that something within their control was wrong in the first place. Rusal and their lawyers have been smart in picking up that change of emphasis. In the end, they are probably also doing the market as a whole a favour by bringing it all to a head (the Rusal suit will probably be heard in February or March 2014, well before the other pending suits – in the US, principally – are ready).

LME's Difficult Position

I don’t like to have to say this, but I think the LME position on this one is difficult; they are no longer pointing at events outside their control, but tacitly accepting that they have an influence in this matter. I suspect the flow of lawsuits will only get faster, now, and I don’t think it will end well. Holding the old line that events were outside their control was probably the easier defence.

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