London Metal Exchange rules governing the release of stockpiles are creating shortages and raising prices for consumers at a time of abundant supply, the European steel industry’s lobby group said.
Buyers can wait as long as 400 days to get zinc, used to galvanize steel, even as supply exceeds demand, the Brussels-based group said in a report posted on its website. The lines are forming because the metal is stuck behind orders from the same warehouses for aluminum, inventories of which are near a record. There should be minimum delivery rates for each metal in each warehouse, Eurofer said.
The bourse, bought by Hong Kong Exchanges & Clearing Ltd. last year, has sought to ease the backlogs by increasing the amount of metal that some warehouses must deliver and setting separate rules for tin and nickel. The changes failed to stop increases in the premiums consumers are paying to secure supply, Eurofer said. The current rules benefit producers and investors while harming consumers, the group said.
“The LME rules applied to affiliate warehouses pose serious concerns about the real availability of metals,” Eurofer said in its report. They are “preventing natural market principals of demand and supply and are helping small category of actors in creating artificial shortage of material while negatively impacting a whole range of consumers in the downstream processing chain.”
Eurofer’s members include ArcelorMittal, the world’s largest steelmaker, Outokumpu Oyj, Salzgitter AG, Tata Steel Europe Ltd., ThyssenKrupp AG and a unit of U.S. Steel Corp. They produce a combined 190 million metric tons of steel a year.
Warehousing companies include Pacorini, owned by Glencore International Plc, and Metro, operated by Goldman Sachs Group Inc. Charles Watenphul, a spokesman for Glencore in Baar, Switzerland, and Sophie Bullock, a spokeswoman for Goldman in London, declined to comment. Miriam Heywood, a spokeswoman for the LME, said the exchange has no comment.
The LME monitors about 700 warehouses globally, governed by rules that allow metal to be delivered against the bourse’s futures contracts. The network was designed to absorb supply during gluts and release inventories when shortages emerge, Eurofer said. Instead, traders are increasingly using the system for financing purposes, the steel group said.
The financing deals typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when later-dated contracts cost more than those with nearer dates. To be profitable, the spread must exceed storage, financing and insurance.