By Veronica Brown and Susan Thomas
The London Metal Exchange's new CEO said he was ready to fight multiple lawsuits brought over its global warehousing network, and that critics shouldn't expect a silver bullet to fix their concerns with it.
The world's biggest and oldest metals marketplace has come under increasing regulatory and legal scrutiny over its metal storage practices, with complaints about long queues to withdraw physical metal from its warehouses.
Clients of the warehouses say the system inflates prices for aluminum even though the market is in global oversupply.
This has resulted in U.S.-based lawsuits by consumers, distributors and others alleging aluminum price-fixing and anti-competitive behaviour by investment banks, large trading houses and the LME.
"What is absolutely clear with these lawsuits in America is there is no basis for including the LME in these suits. We are going to be defending that," Garry Jones told Reuters in an interview.
"There is no smoking gun. There was no complicity. We're going to have a hell of a defense for that. And its annoying because it will take management time. We are confident of being right."
The LME, acquired by Hong Kong Exchanges and Clearing last year for $2.2 billion, has proposed rules to overhaul its delivery system from next April that would force warehouses to release more stocks once the wait-time breaches 100 days. But the proposals have also been criticized by major producers and end-users of metal.
Consumers, including brewer MillerCoors LLC and aluminum products maker Novelis, want drastic changes to warehousing rules to bring down what they pay to get metal, known as a premium.
Russia's United Company Rusal, the world's largest aluminium producer, publicly lobbied for the LME to leave its warehousing rules unchanged or risk damaging the whole market. Alcoa has also laid out its opposition to the potential changes.
Jones said whatever the exchange did, or did not do would not satisfy everyone.
"I think they feel by shouting loudly and making a big fuss it's going to influence things, and it's not really."
"We won't come up with a silver bullet that will please everyone but I hope we come up a reasonable plan."
He said the LME would hold a board meeting later this month to discuss the results of its proposal and other ideas that had come up through the consultation process, before making a final decision.
Competition
Sensing a vulnerability in the LME's dominance of aluminium, CME Group Inc has said it planned to launch a physically deliverable aluminium futures contract that could compete with the London exchange's $54 billion market.
The exchange has been quietly canvassing producers, traders and end-users on launching a competing contract for the past year.
"Customers want a viable alternative to other exchange contracts on offer today," Harriet Hunnable, managing director of metals at CME Group said, adding progress on launching the contract was "very developed" and it would start in the United States.
Jones said he was not losing sleep over the announcement, but took the challenge seriously.
"If a well-capitalised competitor competes with you, obviously you have to take it seriously."
There are very few examples of upstart commodity contracts dislodging a critical portion of liquidity from an established market.
The New York Mercantile Exchange (NYMEX), now owned by CME, struggled for 10 years to gain traction with a North American aluminium contract before being delisted in 2009. It was unable to lure established users away from London.
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