FACE President Malcolm McHale cited in Reuters

Buyers’ complaints prompted EU enquiry into metals markets

LONDON, Nov 19 (Reuters) – Frustrated buyers of aluminium and other industrial metals prompted the European Commission’s current enquiry into record high surcharges and access problems linked to warehouse backlogs, according to industry sources.

The Commission’s Enterprise and Industry department is looking at access and cost problems in aluminium and zinc in Europe “before deciding whether action is necessary”, it said last week.

“Despite the high levels of stocks, the volume of metal available to consumers remains tight, resulting in high metal price premiums,” spokesman Carlo Corazza explained in an email.

Four sources told Reuters the action was prompted by complaints from industrial consumers and industry bodies that represent them. The mandate of the European Commission obliges it to follow up on such complaints.

Premiums for aluminium, paid above the London Metal Exchange (LME) base price to secure physical metal delivery, are at record high levels, hurting industrial buyers who cannot pass these costs onto their clients.

“We’ve raised the issue of structured market shortage in the EU with the European Commission, but we’ve raised it on a broader brush than some of our colleagues,” said Malcolm McHale, president of the Federation of Aluminium Consumers in Europe (FACE), whose members include producers as well as fabricators.

“You can’t ignore the fact that producers choose to supply metal to warehouses or to investors for financing deals, and that this keeps the market short of metal. But now somebody has told the Commission the problem is also related to LME warehouse load-out rates, so they’re enquiring about that also.”

The LME, the world’s biggest metals marketplace, allows warehouse owners including banks and trade houses with big market positions to release only a fraction of their stocks per day.

Critics say these rules cause long queues for metal and an artificial tightness in supply that pushes up premiums.

The LME says the backlogs are caused by investors who use metal as collateral for financing deals that concentrate supplies in locations where rent is cheap.

The deals also tie up stocks for years, creating a shortage and pushing up premiums.

LME Chief Executive Martin Abbott told a news conference on Friday the Commission had not approached the LME with any questions, but added “the door is open”.

Asked for comment on Monday, an LME spokeswoman pointed to Abbott’s response.

REMEDIES

“This entire situation needs to be investigated before it gets any worse. You need to know what the facts are to know whether your remedies are legal, regulatory or legislative,” said antitrust lawyer Robert Bernstein of Vandenberg & Feliu in New York.

The current enquiry by the Commission’s Enterprise and Industry department cannot result in legal remedies.

It can, however, pass on recommendations to national authorities who might consider regulatory or legislative changes.

“They cannot oblige or force change, they don’t have powers to change anything quickly,” said an antitrust lawyer based in Brussels, who declined to be named.

“They could look at longer-term regulation, but they need some kind of legislative instrument that is then adopted by the member states and implemented into international law.”

A bigger worry for producers and for LME warehouse owners such as banks and trading houses – who profit from metals backlogs – is the possibility that the enquiry is passed on to the European Commission’s Competition directorate.

The directorate looks at cartels, price-fixing, market-sharing and monopoly behaviour. It has investigative powers, and can impose fines of as much as 10 percent of global revenues on companies found in breach of EU competition law.

“I’d expect the competition authorities to be looking at this as the subject has been raised with them,” said McHale of FACE.

“When someone says the market is being kept short, and big finance houses who are LME members are managing massive inventories of metal in warehouses and outside warehouses, where else would you go but the competition authorities,” he added.

Yet one industry source, who spoke to the Commission about high premiums and access problems but who declined to be identified, said he did not expect Enterprise and Industry’s enquiry to result in an official investigation.