By Eric Onstad and Polina Devitt
LONDON/MOSCOW (Reuters) - The world's biggest aluminium producer Rusal <0486.HK> has begun legal action aimed at having the London Metal Exchange (LME) overturn planned reforms to its warehousing policy, worried about further falls in the price of its metal.
The judicial review sought by the loss-making Russian company comes as the LME defends itself against U.S. lawsuits alleging the exchange, two of Wall Street's biggest banks and big commodity merchants conspired to raise the price of aluminium.
Rusal's dramatic action underscores the difficulty facing the LME as it tries to fend off criticism over its handling of a years-long crisis over warehousing.
The stakes are also high for the LME's owner, Hong Kong Exchanges and Clearing Ltd <0388.HK>, as it seeks to restore confidence among traders, producers and consumers who use the LME's prices to buy and sell metal across the world. The Hong Kong exchange bought the LME last year for some $2.2 billion (1.3 billion pounds).
The LME is caught between producers such as Rusal who fear rule changes could lower aluminium prices, deepening their losses, and industrial users who have long complained that prices have been propped up artificially.
Rusal said it filed a UK judicial review on Monday, demanding the scrapping of the LME's changes.
Under unprecedented regulatory, political and legal scrutiny, the LME unveiled sweeping changes last month in response to complaints about queues of more than a year and large surcharges to withdraw metal from its warehouses.
"LME management considers that the grounds of Rusal's complaint are without merit, and will defend any judicial review proceedings vigorously," said the exchange.
"Implementation of the proposed changes to the warehousing policy will proceed as announced."
Rusal is not requesting financial compensation from the LME in its legal action, a source close to Rusal said.
The producer says that an LME consultation process was flawed and it is also arguing a violation of the European convention on human rights, the source added.
The case is expected to be heard in February or March in England's High Court ahead of the planned implementation of the new regulations on April 1, said the source, who declined to be named.
While it was unclear if the legal action could scupper the introduction of the rule changes, traders said it may force the exchange to postpone their introduction.
The Financial Conduct Authority (FCA), which oversees the exchange, declined to comment.
FEAR OF FURTHER LOSSES
Rusal, which posted a recurring net loss of $132 million in the third quarter, is concerned that the new regulations will lower premiums which consumers pay on top of LME cash prices for metal for immediate delivery, the source said.
The underlying LME price will probably eventually rise, but that could take some time and leave producers exposed. "Rusal... expects that the time lag will be between 18 months and as long as three years," the source said.
Benchmark aluminium prices on the LME have lost more than a third of their value since touching a peak in May 2011, due to a glut of supplies, causing losses for producers, although strong premiums have helped offset the decline.
This year aluminium is down about 15 percent and was trading on Tuesday at around $1,750 per tonne.
"One can see why Rusal might view the LME's new rules as not in Rusal's interests. But at first sight, the case looks a bit of a long shot to me," said an analyst in London, declining to be identified.
Up to half of all global aluminium capacity is generating losses at the current price even with the premium, which is paid on top for physical delivery, he added.
The LME is facing a series of lawsuits filed by manufacturers in the United States. Superior Extrusion Inc is the lead plaintiff in one of at least 12 class-action suits filed against banks, trading houses and the LME. [ID:nL6N0GA3G0]
Goldman Sachs , JPMorgan and Glencore-Xstrata are accused of stockpiling metal in warehouses and delivering it slowly, thereby driving up prices of products from soft-drink cans to aircraft.
Plaintiffs argue the LME abetted the scheme by writing rules that made it possible and ignoring calls to change.
The firms and the LME say the claims are baseless.
The lawsuits coincide with a probe by the U.S. Department of Justice into the metals warehousing industry and the ownership of physical assets by Wall Street banks.
(Additional reporting by Manolo Serapio Jr in Singapore and Josephine Mason in New York; Editing by Himani Sarkar, William Hardy and Krista Hughes)
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