LME Alters Warehousing Rules to Shorten Withdrawal Times
The London Metal Exchange, the world’s biggest industrial-metals marketplace, changed its rules to speed up withdrawals from warehoused stockpiles amid consumer complaints that prompted scrutiny from U.S. regulators.
The changes will affect depots where waiting times exceed 50 calendar days, a notice e-mailed to LME members yesterday showed. The exchange’s original July proposal pertained to sites where waits were longer than 100 days. The LME also said it will review its warehouse system every six months and is studying its powers to regulate warehousing companies’ charges.
Consumers of metals including brewer MillerCoors LLC complained that lengthy waits for stockpiled supplies inflated costs. That spurred U.S. regulators to subpoena documents from warehouse operators including a Goldman Sachs Group Inc. (GS) unit, according to people with knowledge of the probe. The changes are scheduled to take effect April 1, said the LME, founded in 1877 and now a unit of Hong Kong Exchanges & Clearing Ltd.
“With the current proposal they addressed most of the things that were not working,” said Michael Widmer, an analyst at Bank of America Corp. in London. “The system is broken. The LME has a physically deliverable contract that is not physically deliverable.”
Warehouses with waiting times above 50 days will be required to ship out metal every day exceeding the amount they take in by at least 1,500 metric tons under the changes. The LME also plans to create a Physical Market Committee that will have a “substantial role” in the warehouse reviews and to commission a full external logistical review of warehousing.
“We believe that the amended proposal is, on balance, the best solution for all market users,” Garry Jones, who became the exchange’s chief executive officer at the end of September, said in the notice.
The LME, where investors bought and sold contracts worth $14.5 trillion last year, oversees more than 700 warehouses around the world. Waiting times exceed 50 days in Detroit, New Orleans, the Dutch city of Vlissingen, Malaysia’s Johor and Antwerp in Belgium. New Orleans and Johor are the two biggest repositories for copper stocks, while Detroit and Vlissingen hold the most aluminum.
“The London Metal Exchange is right to take action to respond to the hardships faced by aluminum end users, and the concerns raised by government regulators and policy makers,” U.S. Senator Sherrod Brown, a Democrat from Ohio, said in an e-mailed statement. “However, we need a clear, enforceable, and immediate standard that fixes the problems.”
Brown, who leads a Senate Banking subcommittee, held a hearing in July on banks’ activities in commodities warehousing. He plans to hold another hearing on Nov. 20 with regulators, according to a person familiar with the schedule.
Goldman Sachs and mining company Glencore Xstrata Plc (GLEN), which also has a warehousing unit, declined to comment. The LME consulted market participants for three months on the changes.
The LME also said yesterday it will introduce separate delivery requirements for steel. In addition, the exchange plans to start releasing delayed inventory data on a per-warehouse basis and separately publish reports on traders’ positions that may take three to six months to prepare, Jones said at a press conference in London.
Withdrawing stockpiled aluminum takes a near-record 18.9 months in Detroit and 18 months in Vlissingen, researcher Harbor Intelligence estimated Nov. 4. Premiums added to LME prices reached the lowest levels in more than a year after the exchange made its original recommendation, before rebounding last month.
Premiums will fall at a faster pace as a result of the rule changes, Matthew Chamberlain, the exchange’s head of strategy and implementation, said at the press conference. Waiting times may rise at first as investors order metal removed from warehouses before dropping back, he said.
The exchange had said in July warehouse companies might raise rent and withdrawal charges to compensate for lost income. The amended changes address concerns about such “unintended consequences,” Chamberlain said.
He also said the LME will “absolutely consider” using its powers to regulate withdrawal times if it sees “rent inflation or FOT inflation going forward.” FOT, or free-on-truck, is a charge to load metal being withdrawn from stocks.
“We are calling for the self-discipline of the warehouse operators,” Chamberlain said. “Competition law, particularly in Europe, is developing quickly. It’s right that we always consider our options and update our advice, and we are absolutely continuing to do that in respect of our powers to cap rents, which have been requested by many respondents of the consultation.”
The changes are the first step in strengthening the LME’s warehousing arrangements and making the market more transparent, the U.K. Financial Conduct Authority, which supervises the exchange, said in a statement on its website.
“These decisions will make a strong and sustained contribution to the smooth running of the LME system once they come into force,” Simon Collins, head of non-ferrous and bulk commodities at raw-materials trader Trafigura Beheer BV, said in an e-mailed comment. Trafigura also runs warehouses.
The original proposal was criticized as a potential spur to further market distortion by United Co. Rusal, the world’s largest aluminum producer. Alcoa Inc., which ranks first in the U.S., urged the LME to suspend the plan. MillerCoors and soft-drink makers, who use aluminum in cans, said the proposed changes would do too little to reduce backlogs.
Alcoa shares dropped as much as 7.8 percent yesterday in New York, while Rusal declined as much as 2.9 percent in Hong Kong.
“Over the longer term, we should see more closures in some of the aluminum smelters because they have survived on the premiums,” said Grant Sporre, an analyst at Deutsche Bank AG in London. “Therefore, the flat LME price should rise. The net result over the longer term is that consumers will still pay the same price for their metal.”
Aluminum for delivery in three months fell 12 percent this year to $1,823 a ton on the LME. Goldman Sachs said last month policies aimed at reducing the queues would affect the economic role of the exchange market, stoke price volatility and lead to more metal being stored outside the exchange.
Glencore’s Pacorini Metals has the most Vlissingen depots and Goldman Sachs’s Metro International Trade Services LLC dominates in Detroit. Goldman Sachs and JPMorgan Chase & Co., which also has a warehouse unit, received subpoenas from the Commodity Futures Trading Commission, according to two people familiar with the probe. Glencore also was subpoenaed, another person said Aug. 13.
“The implementation of this proposal will result in smaller, independent LME warehouses being able to compete more successfully in this market,” Simon Maddocks, chief executive officer of CWT Commodities (Metals) Ltd. in London, a warehouse company approved to store metals, said by phone yesterday.
The LME last year doubled the minimum rate at which warehouse companies storing more than 900,000 tons at a single site must ship out metal. This year it introduced an extra delivery requirement for storage companies where withdrawal orders exceed 30,000 tons of a single metal, as well as separate minimum daily deliveries of tin and nickel.
Eighteen class-action lawsuits were filed against the LME, Hong Kong Exchanges said Nov. 6. The LME said the lawsuits are without merit. Beverage makers have said banks and other warehouse owners are manipulating aluminum supplies and slowing deliveries to drive up prices.
While the new rules will permit more aluminum to leave warehouses, so-called financing transactions may still prevent supplies from reaching consumers. As much as 80 percent of the LME’s 5.35 million-ton aluminum stockpile and 60 percent of zinc inventories may be tied to the accords and unavailable for withdrawal, Societe Generale SA estimates.
“Financing of stock will continue to remain attractive, even with this 50-day cap,” Robin Bhar, an analyst at Societe Generale in London, said by phone yesterday. “It doesn’t mean that consumers will have more availability of physical metals. It would accelerate flow of metal from the LME system into the hidden system. This would seem to suggest that we would get less transparency, rather than more.”
Investors use the transactions to capitalize on markets in contango, when prices rise for later deliveries. The accords typically involve buying metal for nearby delivery while making a forward sale, with profitability influenced by the spread, rent charges and borrowing costs.
Hong Kong Exchanges bought the LME for $2.2 billion last year.
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