The Future of LME Aluminium meeting market needs

Transcription

1 The Future of LME Aluminium meeting market needs Matthew Chamberlain, Head of Business Development Metal Bulletin 29 th Annual Aluminium Conference 23 September 2014 Abu Dhabi

2 LME s commitment to the global aluminium industry 1. Unrelenting focus on warehouse reform 2. Broad market engagement 3. Regional Premium futures contracts 4. Recommitment to the NASAAC contract 1

3 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Lots (thousands) Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Lots (thousands) LME aluminium trading trends LME primary aluminium development since 2008 MONTHLY VOLUMES 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, ,600 1,400 1,200 OPEN INTEREST 1,

4 1. Unrelenting focus on warehouse reform 3

5 Key principles of the Linked Load-In / Load-Out Rule (As revised following the 2013 Consultation) Target warehouses with queues over 50 calendar days All other warehouses unaffected Grandfather existing metal If no more metal is loaded-in, then loadout rates do not change Link load-out to load-in If more metal is loaded-in, then more metal needs to be loaded-out In the medium-term: Stops queues growing Shrinks queues 4

6 Legal update Legal issue LME legal update Consistent progress being made UK LEGAL SITUATION US LEGAL SITUATION Judicial Review brought by Rusal against introduction of the LILO Rule Complaints brought by direct and indirect purchasers of aluminium and direct purchasers of zinc alleging anti-trust conspiracy Initial finding for Rusal on 27 March 2014 Appeal on July 2014 Awaiting judgment LME immunity arguments in aluminium case granted on 25 August 2014 Aluminium antitrust case dismissed on 30 August 2014 Implementation of LILO delayed until judgment received followed by either introduction or reconsultation Further opportunity for plaintiffs to replead / appeal; LME maintains these complaints are without merit 5

7 Awaiting outcome of the appeal Core appeal scope Delivered / underway A comprehensive reform package Detailed, practical and balanced set of measures Creation of Physical Market Committee plus ongoing six-monthly reviews Further Warehouse data transparency Enhanced LME investigation and action powers for artificial queues Commitments of Traders transparency Separate load-out rate for steel Best-practice information barrier policy Enactment of the Proposal (with 50-day queue threshold) Enactment of warehouse logistical review Enactment of Warehousing Agreement legal review Rules changes to facilitate premium hedging solutions Assess powers to limit rents in queues as a future policy option Structural solution to high charges 6

8 Net load-in (thousand tonnes) Load-in is falling Continued impact of potential LILO introduction Continued pattern of reduced net load-out (or net load-out) since announcement of original Consultation Net load-out activity at Vlissingen (-133,616 tonnes from 2-Jul Aug-14) Warehouse operators apparently proceeding on the basis that LILO will be introduced Accordingly, stock growth capped, but not falling as quickly as would likely occur under LILO Reduced load-in during the Preliminary Calculation Period 1,200 1, (200) (400) (600) Impala Antwerp Pacorini Johor Pacorini Vlissingen Metro Detroit Pacorini New Orleans 2-Jul Aug-13 2-Jul Aug-14 7

9 Cancelled tonnage (thousand tonnes) Cancellation activity Cancellation represents the key driver of queues Cancellation activity materially drives queue development Queue growth at Detroit and Vlissingen continues to be driven by cancellation activity 62% of Vlissingen warrants, and 84% of Detroit warrants, now cancelled Once cancellation activity falls (or all warrants are cancelled), effect of LILO would be to cause queues to fall as well Cancellation analysis (percentages show cancelled warrants as proportion of total stock) 1,400 1,200 56% 62% 69% 84% 1, % % 59% 17% 7% 1% Impala Antwerp Pacorini Johor Pacorini Vlissingen Metro Detroit Pacorini New Orleans 28-Jun Aug-14 8

10 Waiting time (calendar days) Queue development Cancellation represents the key driver of queues Incumbent queues development driven almost exclusively by warrant cancellation, given flat load-in by operators Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Impala Antwerp Pacorini Johor Pacorini Vlissingen Metro Detroit Pacorini New Orleans Key: Consultation 000 announcement Decision announcement Judgment Aspirant queues now appear to have fallen away Data as of 31-Aug-14 9

11 Longest waiting time (calendar days) Queue lengths by metal Significant reduction in queues across most metals Primary Aluminium Copper, Aluminium Alloy April May June July August NASAAC, Zinc and Lead Molybdenum, Steel, Tin, Nickel and Cobalt Data as of 31-Aug-14 10

12 Special Committee powers to investigate and act Broadened scope to intervene in the case of artificial queues Special Committee Terms of reference 2.2 The Special Committee shall have oversight of, and responsibility for, the imposition of additional load-out requirements on a warehouse pursuant to clause of the Warehouse Agreement. Warehousing Agreement The Exchange shall have the power to compel Warehouses to provide any information in accordance with Clause 9.3.3, including, without limitation, details of all inducements paid to attract the load-in of metal, and details of the provenance of loaded-in metal, including information about metal which may have been held previously in that Warehouse, or in another facility operated by the same Warehouse or member of the Warehouse s group. On the basis of such information, the Directors may, at their discretion, impose additional load-out requirements on a Warehouse which the Directors consider to have intentionally created or caused, or attempted to create or cause, a queue by the use of inducements or any other method. 11

13 2. Broad market engagement 12

14 Physical Market Committee members Pan-industry representation meetings in April and June 2014 so far Phillip Crowson Chairman Suzanne Frost, Rexam Thorleif Schjelderup, Hydro Aluminium Rodrigo Hernández, Codelco Alexander Schmitt, Anglo American Christophe Koenig, Aurubis Shaun Verner, BHP Billiton David Lilley, Red Kite Tim Weiner, MillerCoors Nick Madden, Novelis Rick Whitby, Mitsubishi Tarun Porwal, ArcelorMittal Joe Williamson, Southwire Tim Reyes, Alcoa Jin Xiaoguang, Minmetals Ian Scarlett, Luvata TBC, Coca-Cola 13

15 LME product development process Market-led engagement to establish areas of real customer need Market views on development priorities Detailed market engagement Full specifications Delivery PRECIOUS FERROUS ALUMINIUM PREMIUM CONTRACTS Product refresh - NASAAC 14

16 3. LME regional premium futures contracts 15

17 Composition of premiums Premium futures contracts will enable market participants to hedge the regional premium of readily available metal PREMIUMS Queue related Non-queue related LME committed to take action Queues will fall over time might go up first, but eventually will go down Queue-based premiums will fall accordingly Outside current scope of LME prices Driven by market supply / demand factors Location Shape, brand, quality FoT charge Premium futures contracts may additionally help to manage queue-based premiums while these continue to exist LME traded Premium contracts Region FoT charge Queue length 16

18 Comprehensive market engagement Market requirements now well-understood Physical price discovery Protect the global contract structure Enhance regional price benchmarks Ensure LME hedge effectiveness Physical delivery remains last resort 17

19 LME premium contract construction illustrative Premium contract trading without diluting liquidity from the regular LME market A Buyer 1 2 Current LME Aluminium Contract $2,114 With LME Premium Contract LME base contract LME premium contract $2,114 $452 $2,566 B Seller LME Warrant May be queued (e.g.detroit / Vlissingen) LME Regional Premium Warrant Not in a queue In relevant region (e.g. Baltimore for North America) Note: LME premium contract indicatively assumed to trade at current surveyed US Midwest Premium level. Data as of 1 September

20 Availability of LME premium metal in the US There is plenty of readily-accessible metal in unaffected warehouses (albeit subject to financing), but these warrants may not come up in settlement Closing stock of aluminium warrants 30 June 2014 (metric tonnes) St Louis: 0 Chicago: 1,675 Detroit: 1,310,950 Toledo: 10,050 Baltimore: 193,100 Los Angeles: 6,100 Owensboro: 0 Mobile: 50,375 Location without queues Location with queues New Orleans: 500 Source: LME Stock report, LME Sword Note: LME US Aluminium Premium Futures Contract covers the Midwest, Northeast and South US regions 19

21 Availability of LME premium metal in Europe There is plenty of readily-accessible metal in unaffected warehouses (albeit subject to financing), but these warrants may not come up in settlement Closing stock of aluminium warrants 30 June 2014 (metric tonnes) Liverpool, UK: 7,150 Hull, UK: 3,900 Bilbao, Spain: 24,700 Tyne & Wear, UK: 9,875 Vlissingen, Netherlands: 2,061,725 Rotterdam, Netherlands: 760,775 Moerdijk, Netherlands: 0 Helsingborg, Sweden: 12,400 Hamburg, Germany: 43,500 Genoa, Italy: 12,000 Antwerp, Belgium: 46,050 Bremen, Germany: 0 Trieste, Italy: 85,050 Location without queues Location with queues Barcelona, Spain: 0 Leghorn, Italy: 775 Source: LME Stock report, LME Sword Note: LME Western European Aluminium Premium Futures Contract covers Western Europe as defined by the UN Geoscheme M49 classification 20

22 Availability of LME premium metal in Asia There is plenty of readily-accessible metal in unaffected warehouses (albeit subject to financing), but these warrants may not come up in settlement Closing stock of aluminium warrants 30 June 2014 (metric tonnes) Gwangyang, Korea: 27,875 Incheon, Korea: 10,275 Busan, Korea: 18,525 Nagoya, Japan: 0 Yokohama, Japan: 0 Johor, Malaysia: 34,650 Kaohsiung, Taiwan: 0 Location without queues Location with queues Port Klang, Malaysia: 16,075 Singapore, Singapore: 323,600 Source: LME Stock report, LME Sword Note: LME Eastern Asia Aluminium Premium Futures Contract covers Eastern Asia, and the LME South-Eastern Asia Aluminium Premium Futures Contract covers South-Eastern Asia, both as defined by the UN Geoscheme M49 classification 21

23 Summary contract specifications LME Aluminium Premium Futures Contract Settlement Physically delivered futures contract Date structure Metals Monthly 3rd Wednesday contract out to 15 months Market participants prefer monthly contract to concentrate liquidity Initially build and launch premium futures contracts for Aluminium Other metals may be added later if sufficient market demand Four different contracts covering the key regions of metal demand Regions Warrant eligibility Ensure balance between liquidity concentration and relevance for physical market Extended US Midwest region (broadly defined per market convention) Western Europe East Asia (Japan, Korea, Taiwan) South East Asia (Singapore and Malaysia) Aluminium warrants in warehouses without queue Protection mechanisms against future queues 22

24 4. Recommitment to the NASAAC contract 23

25 LME NASAAC contract Supports clear market need Average aluminium content per car produced Source: European Aluminium Association Data relates to European Car Production 24

26 Recommitment to NASAAC Key questions Warehouse queue impact on price Correct specification? Market engagement 25

27 Longest waiting time (calendar days) NASAAC warehouse queue Clear reduction in queue time since April April May June July August 26

28 NASAAC price convergence As of Sept 15 th, the difference between LME NASAAC and Metal Bulletin was $202 LME NASAAC compared to Metal Bulletin aluminium alloy A380 (delivered in the Midwest) 27

29 LME NASAAC physical contract specification Best fit for the market Quality Aluminium alloy conforming to the LME NA380.1 specification (an LME modification of The Aluminium Association Inc. A380.1 specification (1989)) Shape Ingots, small sows, large sows, t-bars Lot size 20 tonnes Warrant 20 tonnes (with a tolerance of +/-2%) Brands All aluminium alloy deliverable against LME contracts must be of an LMEapproved brand 28

30 Recommitment to NASAAC Key questions Warehouse queue impact on price Correct specification? Market engagement 29