Why aluminum prices have beverage companies complaining

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Oct. 29 2019, Updated 8:40 p.m. ET

Aluminum trading rules at the London Metal Exchange 

The London Metal Exchange (or LME) is the world’s biggest metals trading index. We have seen previously that the LME–approved warehouses are flooded with five million tons of inventories. Despite the huge inventory pileup, the waiting time to take the delivery of the metal was several months. In fact, the waiting time to take delivery of aluminum at the LME warehouse in Vlissingen, a Dutch city, was close to two years.

What prompted beverage companies to complain?

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Because of these artificially created shortages and delays, the premiums that the aluminum companies charge to give the delivery of physical metal were increasing. There were complaints from beverage companies like Coca-Cola (KO) and SABMiller because they weren’t able to meet the aluminum requirements for their bottling plants.

Being aware of this, LME changed the warehouse rules early this year. The new rules require warehouses to ship out more aluminum than they take in once the waiting period exceeds 50 days. This rule was expected to bring the excess inventories out of warehouses and to drive down the high premiums.

Why was LME unable to implement the new rule?

The change in regulation would have been a blow to aluminum companies’ profitability. Realizing this, United Company Rusal, the world’s biggest aluminum producer, filed a lawsuit in a United Kingdom court. Courts halted this key reform initiated by LME and ruled in favor of Rusal. The matter is currently under consideration in British courts. Aluminum prices rallied after a court ruled against this new rule. The chart above shows the movement in aluminum prices.

If LME is able to implement this new rule, aluminum prices are expected to come down. Although negative for aluminum companies in the short term, the move will help restore long-term normalcy in aluminum markets.

Investors of Alcoa (AA), Century Aluminum (CENX), Kaiser Aluminum (KALU), Constellium (CSTM), and the SPDR S&P Metals and Mining ETF (XME) need to closely watch these proceedings.

In the next part of this series, we’ll discuss the Chinese consumption story and its impact on aluminum companies.

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