A proposed requirement for London Metal Exchange-monitored warehouses to deliver an additional 500 metric tons of metal a day is “reasonable” and will be under review, Chief Executive Officer Martin Abbott said.
The LME, which has a network of more than 600 warehouses, said yesterday minimum delivery rates from warehouses may increase by 500 tons for storage companies in locations where at least 30,000 tons of one metal awaits delivery. The rule, which is expected to come into effect from April 1, will address the issue of long aluminum wait times slowing down the delivery of other metals, Abbott said.
“Five hundred tons, it seems to us right now, is reasonable and obviously it will be under review,” Abbott told reporters in London today. “It’s not a sort of tentative first step. We do think that it will achieve our purposes. If it turns out it doesn’t then we’ll review it, but it’s not a death by a thousand cuts. We do think this is good enough.”
Current minimum delivery rates require the daily release of at least 3,000 tons of any metal from stocks exceeding 900,000 tons at a single location. A separate requirement for delivery of nickel and tin will be introduced in April. Withdrawals can take as long as 59 weeks in Detroit, the biggest LME repository of aluminum. Withdrawing aluminum held in Vlissingen, the second-biggest LME location for the metal, may take as long as 54 weeks.
The new rule will address consumer needs and is also “doable,” Abbott said. “It’s not going to make aluminum queues go away because it’s not actually targeted at aluminum. There is a danger that those aluminum factors may be having an effect on other markets, which are not actually subject to the same macroeconomic factors,” he said, referring to copper, lead, zinc, nickel and tin markets.
Aluminum for delivery in three months fell 0.8 percent to $1,949.25 a ton by 1:42 p.m. on the LME. Prices are down 3.5 percent this year. The premium added to the immediate-delivery price is at a record $280 to $295 a ton at warehouses in Rotterdam, including a duty into the EU, Platts, a unit of McGraw-Hill Cos, said last week. The fee in the U.S. reached a record 11.15 cents a pound on Oct. 22, according to Platts.
Consumers are getting aluminum for less than before because the price of the metal on the LME has declined enough to counter record-high premiums, Abbott said. Still, consumers prefer a combination of higher LME prices and lower surcharges because of how they handle their profit margins, he said.
The spot premiums have risen even as stockpiles of the metal climbed. Inventories of the lightweight metal are at 5.1 million tons after rising to a record 5.13 million tons in February, LME data showed today. About 65 percent to 70 percent of the LME stockpiles are locked in so-called financing transactions and not available to the market, according to Societe Generale SA.
“There is a huge amount of metal that is being financed,” Abbott said, referring to aluminum. “I hope that the other metals don’t simply become chips in the financing game.”
At yesterday’s LME cash price of $1,943 a ton, the current European premium means about 13 percent of the total aluminum price can’t be hedged to protect from price changes, according to Bloomberg calculations. Hedging aluminum premiums is an “interesting area to look at,” while it won’t be a “panacea,” deputy CEO Diarmuid O’Hegarty said at the same press briefing. Abbott said there isn’t enough liquidity now to hedge the premiums.
The LME handled contracts worth $15.4 trillion in 2011. Its network of warehouses extends from Singapore to the U.S. Glencore International Plc, Goldman Sachs Group Inc. and JPMorgan & Chase Co. own some of the warehouse companies approved by the bourse to store metals.