CFTC’s Chilton Says ‘Thoughtful Review’ of Warehouses Needed

A “thoughtful review” of commodity warehousing is needed after hearing from users about its effect on markets, according to Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission.

The CFTC sent a letter about the issue, Chilton said by e-mail today, in response to questions from Bloomberg. The U.S. regulator asked companies not to destroy any documents relating to warehouses registered by exchanges such as the London Metal Exchange or Chicago Mercantile Exchange dating to January 2010, according to a copy of the letter obtained by Bloomberg. At least three warehouse operators received the letter, according to three people with direct knowledge of the matter.

Lengthy waits at warehouses monitored by the LME, the world’s biggest metals marketplace, have driven up costs for users of metals from beer makers to cable producers. Goldman Sachs Group Inc., Glencore Xstrata Plc and JPMorgan Chase & Co. are among companies operating LME-approved storage facilities. A Senate subcommittee is due to hold a hearing tomorrow on whether banks should control warehouses, power plants and refineries. The Federal Reserve says it’s reviewing a decade-old ruling to let deposit-taking banks trade commodities.

LME Proposal

The LME has sought to ease the backlogs by increasing the minimum delivery rate at which warehouse companies are obliged to withdraw metal. It proposed rules July 1 to speed up withdrawals from depots where waiting times exceed 100 days by requiring warehouses to deliver out more metal than they take in. Detroit, New Orleans, the Belgian city of Antwerp, the Dutch port of Vlissingen and Malaysia’s Johor are locations affected by those waits, according to Barclays Plc.

The CFTC is aware of potential conflicts involved in warehouses and has heard from “many” metal users that those conflicts are resulting in “market manifestations which ultimately impact consumers,” Chilton said. “If that’s occurring, regulators need to stop it. It shouldn’t take months, or even years, to get raw commodities out of warehouses, particularly when in some cases we see the warehouses have no problem with the stuff going in.”

Goldman’s Metro International Trade Services LLC operates the most warehouses in Detroit, while Pacorini Metals, owned by Glencore Xstrata, dominates in New Orleans, Vlissingen and Johor, according to the LME website. NEMS, controlled by Trafigura Beheer BV, operates most storage facilities in Antwerp. Copper inventories in LME-registered warehouses doubled this year, while aluminum stockpiles climbed to a record this month, as warehouse companies offered incentives to attract metal, forcing consumers to compete with them for metal.

CFTC Order

The CFTC asked companies to “retain, preserve, and safeguard against destruction all documents, communications, and other information and materials” concerning or relating to any warehouses that store physical metals against a futures contract, according to the letter, dated July 18 and mailed from the division of enforcement’s Chicago office.

The premium added to aluminum for immediate delivery on the LME climbed to a record last month in the U.S. Midwest, according to Harbor Intelligence, an Austin, Texas-based researcher. The copper surcharge in the U.S. traded at the highest in almost six years this month, according to Metal Bulletin data.

The Beer Institute in Washington, whose members include MillerCoors LLC and Anheuser-Busch InBev NV’s Anheuser-Busch unit, pressed the LME to “end restrictive and outdated warehousing rules” saying warehouse backlogs boost the cost of aluminum used to make beverage cans. Timothy Weiner, a global risk manager at MillerCoors, is scheduled to testify at the Senate hearing tomorrow, according to a committee statement.

“The warehouses charge storage fees and the bottlenecks can impact prices and potentially move markets,” Chilton said. “That’s not right.”