The London Metal Exchange, the world’s biggest metals marketplace, is seeking to speed up withdrawals from stockpiles in warehouses where waiting times exceed 100 calendar days.
Those warehouses would have to deliver out more metal than they take in, based on a formula, the LME said in a statement today. Market participants are being consulted until Sept. 30, the exchange said. Its board is expected to review the plan in October, and the proposal would take effect April 1 if approved, the statement showed.
LME users have said long waits for withdrawals helped to lift premiums for metals from aluminum to copper. The Beer Institute, representing members including MillerCoors LLC, last month urged the exchange to act to reduce waiting times. Sites with lengthy waits include Johor in Malaysia, the biggest LME copper repository, according to Societe Generale SA.
“If enacted, it will help address the issue, though it will be a gradual process,” said Leon Westgate, an analyst at Standard Bank Plc in London. “The main thing is it looks like it may improve competition in terms of other warehouse locations outside Antwerp, Vlissingen, Johor, New Orleans and Detroit.”
The LME has a network of 765 warehouses in 36 locations worldwide, the exchange’s website shows. There are only five sites where consumers must wait for withdrawals, according to Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., which owns the LME.
“We have undertaken this consultation because it’s important we listen to market participants when concerns arise,” Li said on his blog today.
Detroit, New Orleans, the Belgian city of Antwerp and Vlissingen in the Netherlands are the other locations with long waits for metal, according to Societe Generale.
The LME delisted 83 warehouses and other storage facilities this year as more metal was being drawn to fewer locations. Vlissingen and Detroit account for 64 percent of aluminum inventories tracked by the exchange, and copper stocks in Johor, New Orleans and Antwerp come to 89 percent of the global total, figures compiled by Bloomberg show.
Under the proposal, all metals loaded into warehouses would be measured over three months. For waits of more than 100 days, daily deliveries out of warehouses that are now mandated at 3,000 metric tons would have to exceed inbound shipments by at least 1,500 tons. Sites with queues below 100 calendar days would be unaffected, Matthew Chamberlain, the LME’s head of strategy and implementation, said at a press conference in London today.
“Why 100 days?” he said. “Because in our view and in the board’s view, it is the point at which queues move from being an operational challenge to a strategic threat and when they start to have a strong impact on price discovery, on the LME’s role as the market, the warehouses’ role as the market of last resort, and also on the competitive dynamic between warehouses with queues and warehouses without queues.”
Deliveries from warehouses would be linked to inbound shipments, according to Chamberlain. Storage companies lacking capacity to load out more metal as required by the proposal would be unable to take in new inventory, he said.
“The more metal you load in as warehouse operator, the more you have to load out,” Chamberlain said.
The LME, where investors buy and sell more than 80 percent of industrial-metals futures, last year doubled the so-called minimum load-out rate for warehouse companies storing more than 900,000 tons at a single site. This year it introduced an extra delivery requirement for storage companies where bookings exceed 30,000 tons of a single metal, as well as separate minimum daily deliveries of tin and nickel.
“While these initiatives have increased access to lower-volume metals, it is clear from stock data that they have failed to resolve the persistently long waiting times for certain metals in particular locations,” the LME said today.
Buyers can still get metal from warehouses and there is no “fundamental problem” with the market, Li said on his blog, adding that there’s no need for a “bazooka” to tackle the issue. The LME board has yet to form a view on whether warehousing rules need to be changed, he said.
Higher rents charged by warehouse operators will become “a reality if such a policy change is implemented, thus increasing the disconnect between LME storage and other forms of storage costs,” the exchange said. It has no control over rents and charges for deliveries from warehouses, Diarmuid O’Hegarty, the LME’s chief operating officer, said at the press conference.
Goldman Sachs Group Inc.’s Metro International Trade Services LLC operates the most warehouses in Detroit, while Pacorini Metals, owned by Glencore Xstrata Plc (GLEN), dominates in Vlissingen, according to the LME website. Pacorini also has the most warehouses in Johor and New Orleans, while Trafigura Beheer BV’s NEMS controls most sites in Antwerp.
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