Beer can cost rests on U.K. Aluminum warehouse verdict

It’s been a year since the U.S. Senate held a hearing on logjams at metal storage facilities and rising fees. Since then, costs have gone up and waiting times for delivery at some sites are even longer.

The London Metal Exchange, which oversees more than 700 warehouses, has been blocked from easing delays by Moscow-based United Co. Rusal, which as the world’s biggest aluminum producer stands to lose from shorter backlogs. The LME issued a new rule that storage facilities with the longest wait times had to release more metal than they took in. Rusal blocked the measure in a U.K. court, and the exchange is appealing in a case that started in London today.

Wait times to obtain aluminum stretch to almost two years or longer in Detroit and Vlissingen, Netherlands, the two biggest sites for the LME-tracked metal. That’s up from about 15 months a year ago, when U.S. Senator Sherrod Brown, an Ohio Democrat, called on U.S. regulators to force changes in metals warehousing. Instead, higher prices benefited producers including Rusal and New York-based Alcoa Inc. and hurt end-users such as beverage makers.

Rusal “as a producer, is advantaged by the status quo,” said Michael Beloff, a lawyer for the LME, at the start of the appeal hearing. The company is “heavily reliant” on the continuing high level of fees added to benchmark prices, he said.

The issue came to Senator Brown’s attention after companies such as Denver-based brewer MillerCoors LLC complained that LME-authorized warehouse operators including Metro International Trade Services LLC, a unit of Goldman Sachs Group Inc., and Glencore Plc-owned Pacorini Metals were creating artificial limits on aluminum supply. U.S. regulators subpoenaed documents from warehousers including Metro last year. At least 36 lawsuits have been filed against the LME, Goldman Sachs and metal suppliers.

The price of aluminum for delivery in three months on the LME gained 11 percent in the past year to $1,988 a metric ton. Surcharges to obtain the metal in the U.S. and Europe, known as premiums, increased as much as 73 percent.

The backlog for aluminum at depots in Detroit operated by Metro increased to 681 days as of the end of June from 675 at the end of May, according to the LME data. The period at warehouses owned by Pacorini in Vlissingen lengthened to 774 days from 716 in May. Owners of the metal pay storage fees during that time.

The LME’s new “load-in, load-out” rule, slated to have begun in April, would have “little material effect on warehouse queues,” Rusal said yesterday in a statement.

Global aluminum costs are $6 billion higher because of the long waits, according to Novelis Inc., a manufacturer of rolled aluminum whose customers include Coca-Cola Co. and Dearborn, Michigan-based Ford Motor Co. That’s twice the amount MillerCoors estimated last year.

Just this year, the jump in premiums alone has cost North American consumers an additional $650 million, according to the Beer Institute, a Washington-based industry group.

Warehouse waits are not the only reason costs are higher. Aluminum producers have curbed output and demand is stronger, helped by carmakers who are switching to the metal as a lighter alternative to steel.

Alcoa (AA), the largest U.S. producer, said it will include new language in its quarterly filings with the U.S. Securities and Exchange Commission explaining risks from a potential “flood” of stockpiled aluminum arriving on the market.

The LME’s original plan, to require depots that have delays of more than 50 days to deliver more metal than they take in, was derailed March 27 when Rusal won a legal challenge. Judge Stephen Phillips said the LME’s consultation process leading to the new rule was “unfair and unlawful.”

Judge Rupert Jackson, who granted the LME the right to appeal in May, argued that Phillips’s ruling, “if correct, places onerous obligations on any public body conducting a consultation on complex issues in a politically sensitive area,” according to a copy of the order, supplied by the LME.

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