U.S. aluminum users slam LME's plan to solve warehousing crisis

By Josephine Mason

NEW YORK, Sept 10 (Reuters) - A group of aluminum users, including MillerCoors LLC and other makers of drink cans, have said the London Metal Exchange's proposal to overhaul its controversial warehousing policy will "fall short" of solving the long wait times and inflated prices.

In a letter dated Sept. 9, the so-called "aluminum users group" called on the LME to implement even bigger changes, which they say will end long wait times, increase transparency for physical pricing and restore user confidence in the exchange.

Without that, there will be "more dysfunction, more manipulation and more harm", the letter from the group said. It also asked for a meeting with the LME.

The letter was in response to dramatic changes announced by the LME on July 1, aimed at soothing irate industrial users who say the LME's warehousing policy has led to record high physical premiums for aluminum and long wait times to take delivery.

While some of the group's suggestions may be hard to enforce, the seven-page letter will likely increase pressure on the LME and its new owner, Hong Kong Exchanges and Clearing , to deal with the problem as regulatory, legal and political scrutiny of the exchange intensifies.

Several changes that called for greater regulation and increased transparency at the exchange also underscored prolonged criticism among some industrial users and traders about how the 136-year old exchange is run.

Some consumers say a lack of regulation in the United States and Britain is partly to blame for the problem.

"We encourage the LME to work towards a coordinated regulatory framework across countries and regions. This will help guard against manipulation of LME rules and ensure a fair and open marketplace for metal," it said.

In July, MillerCoors, the second largest brewer in the United States, raised the issue in a hearing at the U.S. Senate Banking Committee, saying high physical prices have cost U.S. consumers an extra $3 billion a year in expenses.

Alongside Goldman Sachs and other banks and traders that now own many of the world's biggest warehousing companies, the LME is facing several class action lawsuits alleging "anticompetitive behavior" in aluminum warehousing.

U.S.and UK regulators are also investigating the issue.

At the heart of the issue are several companies with warehouses registered by the LME, including Glencore-owned Pacorini, Trafigura's NEMS and Goldman Sachs (NYSE: GS-PB - news) ' Metro (Other OTC: MTRAF - news) . These companies have found a lucrative business in building up big stocks, charging rent for storage and delivering metal out of storage only at a limited rate.

In its third effort to resolve the problem in as many years, the LME has proposed linking the rate at which a warehouse, with big stockpiles and long wait times of more than 100 days, is required to load out material to the rate at which it brings in new metal.

In Monday's letter, the group called on the LME to also rein in "exceptional" incentive payments made by warehouses to attract metal and limit charges for moving metal in and out of storage sheds.

Among other changes aimed at improving transparency, it said the LME should have more balanced representation on its committees, provide more information about its auditing of warehouses and enforce firewalls between owners of warehouses and merchants to prevent conflicts of interest, the letter said.

In highlighting flaws in the new plan, it said the maximum wait time of 100 days set by the new rules is still too long and the rules could lead a warehouse to refuse to take delivery of new metal or shift metal to non-LME registered facilities.

The deadline for submitting comments on the LME's plan is Sept. 30. Warehousing companies and trading firms have also given their feedback on the plan, sources have said.

Some of the users' suggestions may be difficult for the LME to implement. Any move to limit rent increases would be deemed as price fixing by the European Union and therefore anti-competitive, the LME has said.

A final decision on whether to implement the changes is expected to be made at a scheduled LME board meeting in October and if approved, the new rules would come into force on April 1 next year.

"The changes we seek are simple and straightforward, and would ultimately result in the LME operating like other commodity exchanges around the world," said the Beer Institute, which represents brewers and beer importers who are part of the user group, in an email to Reuters.