Streetwise Professor

March 28, 2014

A Victory for Neanderthal Rights: Rusal Defeats the LME in Court. But the Neanderthal Is Still Endangered.

Filed under: Commodities,Derivatives,Economics,Politics,Russia — The Professor @ 8:01 pm

Late last year, the company of My Favorite Neanderthal, Oleg Deripaska’s Rusal, sued the London Metal exchange, claiming that the LME’s new rules on load out of aluminum violated Rusal’s human rights.  Yesterday, a judge in Manchester, UK gave Oleg a victory.

Although the judge found the human rights issue “an interesting and difficult question,” he did not rule on it.  Too bad!  That could have been entertaining.

But he did hand Rusal a victory, ruling that the LME’s process in adopting the new rule was flawed (bonus SWP quote).  As a result, the LME will not implement the rule, and has to go back to the drawing board.

Until a new rule is adopted, the bottleneck in the LME aluminum warehouses (notably Metro in Detroit) will remain stoppered.  Premiums will remain high and volatile.

And that’s the point.  By keeping the huge stocks of aluminum that accumulated in LME warehouses during the financial crisis off the market, the bottleneck keeps the prices of aluminum ex-warehouse artificially high.  This harms consumers, but enhances producers’ profits.  Which is precisely why Rusal sued.

But the victory may well by a Pyrrhic one.  For despite the fact that the warehouse bottleneck props up aluminum prices, and despite the fact that Rusal and other producers have reduced capacity, there is still a substantial supply imbalance that has weighed on prices: due to the bottleneck, prices are higher than they would be otherwise, but they are still quite low.  As a result, Rusal just posted a whopping $3.2 billion loss.

The company is heavily indebted, and the chronic losses imperil its ability to pay this debt.  The company has been frantically negotiating with its lenders, and says that if it does not get relief it will default.  Given that Deripaska has pledged shares as collateral for some borrowings, his status as a billionaire is in jeopardy.

Deripaska has been in such straits before.  He is in some ways the Donald Trump of Russia.  Putin bailed him out in 2008/2009.  Will he do it again?

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  1. > But he did hand Rusal a victory, ruling that the LME’s process in adopting the new rule was flawed

    Craig, you seem to be of the opinion that LMF got the short end of the stick. What is your reasoning?

    Do you think that the judge doesn’t understand the law and wrongly interpreted it?

    Or are you saying that the law is on Rusal’s side, but you once again think that laws should be violated any time you wish?

    Comment by vlad — March 30, 2014 @ 11:49 am

  2. The LME’s rule was a reasonable one. Indeed, it should have gone farther. Having worked on contract redesigns for exchanges, I know how contentious they can be and how important procedure is. LME’s procedure seems eminently reasonable, compared to what other exchanges have done, including procedures I have been involved with. The judge’s decision turned on his view of what alternatives LME should have considered. That appears to be extreme micromanagement of LME’s internal management and business judgment. I can assure you Deripaska and Rusal would brook no such second guessing of his/its business judgment.

    The distortions resulting from the existing rules, which Deripaska is fighting to maintain, are manifest. The perfect is the enemy of the good, and the law does not mandate the implementation of the perfect or even the best rule.

    The judge has seized on a procedural technicality well in the realm of the business judgment of LME to perpetuate an inefficiency that profits Rusal (and Alcoa and other producers), and warehouse owners like Goldman and Glencore. The cost benefit here is plain, and contrary to the judge’s ruling.

    The ProfessorComment by The Professor — March 30, 2014 @ 12:23 pm

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