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LME Will Adjust Warehouse Rules for Good of Market, Li Says

Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd., comments on a review of warehouse rules at the London Metal Exchange. Li made the comments on Oct. 19 in London.

“Quite a few things seem to have happened and almost all of them have nothing to do with the LME necessarily. Interest rates, oversupply, ownership changes of the warehouses, a lot of the stocking because of leases, very large financing deals, very concentrated aluminum in few locations. Half a dozen factors, maybe a dozen factors, resulted in some simple issues that are being articulated as long queues and high premiums.

“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 aluminum, as long as there is contango, they will be there. And they will disappear with or without the LME. So the LME is not part of the reason for these leasing deals. The LME warehouses are not part of it. So that needs to be really clearly articulated.

“Is that a physical queue, or is that a mathematical queue? Because 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. Warehouse cancelations or stocks movement is only a small fraction of what is going on in the real economy. It is a mathematical queue -- basically the cancelled warrants divided by your load out rate -- that’s a mathematical queue.

‘Unintended Consequences’

“And then finally they need to also understand whether or not doing something would create unintended consequences that turn out to create bigger problem than you initially wanted.”

“The jury is out. We will continue to work on it when we become an owner. The only thing we have on our mind is what’s good for the broader market. We have no reason to favor the producers, the consumers, the warehouse operators, or the banks. People hopefully will feel that this jury’s verdict is fair.

“We’re really going to be transparent. 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. That’s not the case.”

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