As the world’s leading producer of primary and fabricated aluminum, as well as the world’s largest miner of bauxite and refiner of alumina, Alcoa appreciates the opportunity to submit this statement for the record in connection with the July 23, 2013 hearing before the Senate Banking Committee, Subcommittee on Financial Institutions and Consumer Protection entitled “Examining Financial Holding Companies: Should Banks Control Power Plants, Warehouses, and Oil Refineries?”
Alcoa raises for the Committee’s consideration the need for increased transparency at the London Metal Exchange (LME), which sets the price of aluminum and other non-ferrous metals. Stated simply, the LME does not provide the same quality of information and level of transparency as required by other commodities exchanges, such as those falling under the scope of the U.S. Commodity Futures Trading Commission (CFTC). Alcoa believes that this issue warrants further attention.
The dramatic increase in trading volume on the LME in recent years is predominantly due to the increased trading activity from financial investors who do not participate in the underlying physical markets. While Alcoa recognizes that financial investors are a reality of the current economy, it is imperative that those who participate in the physical aluminum market have confidence in the price setting mechanism of the LME.
Improved transparency into the sources of trading on the LME, which gives all parties concerned the benefit of information that is commonly accessible to market participants in other commodities, is an essential first step toward improving confidence in the marketplace that the LME continues to be the best source of price discovery for aluminum.
To this end, it is Alcoa’s view that the LME should establish reporting similar to the CFTC’s Commitment of Traders (COT) reports, to improve the understanding in the marketplace of the impact and relative influence that financial investors have on the price discovery process. This type of information, and greater transparency, would lead to more clarity on how the rapid growth in speculative trading may be influencing price.
Enhancing the availability and quality of information for all physical commodities that underlie a financial market contract will improve the reliability of price discovery in financial markets.