The London Metal Exchange, the world’s biggest metals bourse, strengthened its powers to investigate wait times for metals at its network of licensed warehouses that customers complained drove up their costs.
The LME will have “enhanced powers” to examine wait times and to impose additional load-out requirements on warehouses that paid incentives to attract metal and create backlogs, it said in a notice to members today. A special committee will be responsible for sanctioning enforcement action.
The LME, which regulates more than 700 warehouses, announced in November steps to help ease backlogs at some locations after complaints from metal users. The new rules, effective April 1, will require warehouse operators with waits longer than 50 days to deliver more metal than they take in. The proposed changes are already affecting the market, it said. Aluminum consumers were paying record premiums last month even as prices fell.
“The market is at risk of becoming dysfunctional if these issues are not resolved, and it will be a great comfort to a lot of people that the LME is starting to take this issue seriously,” Nic Brown, head of commodities research at Natixis SA, said by phone. “Not only do we have these new rules on delivery out taking effect later in the year, but we now have the LME that is looking to take a more active role in trying to deal with this problem.”
Phillip Crowson, a former chief economist at Rio Tinto Group, was appointed chairman of a newly formed LME physical market committee. He also heads the special committee, whose members include LME Chairman Brian Bender and some board directors. The bourse will restructure the warehousing committee to include one invited representative per warehouse operator, Crowson and an independent head, the LME said. Fabian Somerville-Cotton, managing director of ADM Investor Services International Ltd., will stay as the warehousing group chairman, while those members not associated with warehouses will leave.
The exchange hired Oliver Wyman & Co. to conduct a logistical review that will look into rate considerations, suitability of good delivery locations, warehouse companies and storage facilities. The review, which already started, will also assess the process of approving warehouse applications. The LME commissioned a legal review in conjunction with Addleshaw Goddard LLP. A public report on the findings of both reviews is due at the end of August.
Detroit, the Dutch city of Vlissingen, New Orleans, the Belgian city of Antwerp and Johor, Malaysia are five locations affected by long waits for metal. Three out of five warehouses with wait times exceeding 50 days loaded out more stockpiles than they took in between the beginning of July and the end of last month, the LME said in today’s notice. Wait times have been reduced at four of five warehouses, it said.
While aluminum for immediate delivery on the LME fell 19 percent in the past year, the U.S. premium added 79 percent in the period, according to Metal Bulletin data. The U.S. Midwest surcharge accounted for 28 percent of the full aluminum price this week, compared with less than 10 percent in the past, according to Citigroup Inc. Premiums cover a purchase of specific quality of metal in a particular location, reflecting local supply and demand.
Aluminum consumers including brewer MillerCoors LLC said last year that lengthy waits for metal inflated costs by $3 billion. While wait times at LME-tracked warehouses have been partly responsible for rising premiums, “there exists an additional element of premiums that is not related to queues,” the LME said. The LME is “committed” to exploring the possible introduction of premium hedging tools to help the market manage risk, it said today.
“The LME has done what it can to tackle queues,” David Wilson, an analyst at Citigroup in London, said by phone. “You could almost argue that premium levels per se are beyond control of the LME. They can’t do much about financing demand for metal if it’s increasingly happening off-warrant. And that’s the bigger issue.”
Financing transactions involve buying metal for nearby delivery while making a forward sale to benefit from a market in contango, when prices rise for future delivery. Such deals limit the amount of metal available for immediate consumption.