The London Metal Exchange, the world’s largest metals market, will adjust its warehouse rules to be “what’s good for the broader market,” said Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd.
LME CEO Martin Abbott said last week a review of warehouse delivery rates will take six months. In April, the exchange increased the minimum amount that must be delivered daily, after getting complaints about delays since at least 2009. The Hong Kong bourse is buying the LME for $2.2 billion.
“We have no reason to favor the producers, the consumers, the warehouse operators, or the banks,” Li said in an interview in London on Oct. 18. “The only thing we have on our mind is what’s good for the broader market. People hopefully will feel that this jury’s verdict is fair.”
Withdrawing metal from warehouses monitored by the LME can take as long as 56 weeks at the Dutch port of Vlissingen and 48 weeks in Detroit, data compiled by Bloomberg showed Oct. 19.
The question is whether consumers are really waiting weeks for metal from warehouses or whether long waits are just a “mathematical queue,” Li said. “If it’s a physical queue, meaning real consumers cannot have normal production because they have to wait for a year for aluminum to show up, that’s a physical queue and that’s a very big problem,” Li said. “The canceled warrants divided by your load-out rate. That’s a mathematical queue.” Canceled warrants are orders to withdraw metal form warehouses and the load-out rate is the amount of metal that must be delivered out of warehouses.
Premiums buyers pay for aluminum for immediate delivery in the U.S. and Europe have climbed even with aluminum prices down 2.5 percent this year and inventories near a record high. The LME has more than 600 registered warehouses in locations from Singapore to the U.S. that ensure physical delivery against futures. Metals traders Glencore International Plc, Goldman Sachs Group Inc. and JPMorgan & Chase Co. own some of the warehouse companies.
“A lot of the frustration comes from everybody’s perception that the other side has a bigger voice in that boardroom and therefore the management is being beholden,” Li said. “That’s not the case. We’re really going to be transparent.”
Aluminum is locked in some financing deals that typically involve a simultaneous purchase for nearby delivery and a forward sale for a later date. The transaction is profitable so long as the difference between the two exceeds costs including storage, insurance and debt.
“Quite a few things seem to have happened and almost all of them have nothing to do with the LME necessarily,” Li said in the interview. “If the LME stops existing tomorrow, those leasing deals will continue to grow, as long as interest rates are there, as long as there is oversupply of aluminium, as long as there is contango, they will be there. And they will disappear with or without the LME.”
Aluminum premiums may drop if the so-called load-out rates were raised again, according to Atlanta-based Novelis Inc., which processes about 3 million tons of aluminum a year.
A steering committee including Abbott, Deputy CEO and Director of Compliance and Regulation Diarmuid O’Hegarty and Head of Physical Operations Robert Hall, was set up to review warehouse rules, the exchange said in August. The review is proceeding and will take six months, Abbott said Oct. 15. The debate is “complicated” and the LME cannot afford a short-term view on waiting times, Abbott said Oct. 16.
“If the consumers actually are ending up having to pay more than they should because of the LME system we also have a big issue,” Li said at a seminar on Oct. 15. Li was in London for LME week, which attracts thousands of miners, refiners and traders for talks on metals markets and supply contracts.
Premiums buyers pay for aluminum for immediate delivery in the U.S. are 11.25 cents a pound, while the European fee has jumped 47 percent in a year to $280 a ton, Metal Bulletin data on Bloomberg show. At an average LME price of $2,064.12 a ton in September, the average premium in Europe of $279.38 a ton means 14 percent of costs can’t be hedged, or futures bought to protect against unexpected price changes.
Aluminum stockpiles at 5.04 million tons account for about 73 percent of the metal stored in LME warehouses, according to bourse data. The aluminum total was a record 5.13 million tons in February. The exchange in April will introduce new daily levels for the minimum amount of nickel and tin that warehouses must deliver, the bourse said in August. The LME has also this year delisted Vlissingen as a delivery location for copper.
The LME takeover by Hong Kong Exchanges is expected to be completed by the fourth quarter, according to Abbott.