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.