By Pratima Desai
LONDON – The London Metal Exchange (LME) plans to launch a consultation on revamping its warehouse storage rules, four sources with knowledge of the matter said, after bottlenecks resurfaced last year despite a previous overhaul.
Nearly a decade ago, the LME thought it had solved the problem of gridlock in its approved storage facilities with queue-based rent capping (QBRC) rules.
QBRC limits the rental income of warehouses to 80 days after the firm that owns the metal has given notice of intention to take delivery or cancelled the warrants – title documents conferring ownership.
But one consequence has been that some traders with contractual obligations to deliver metal to customers beyond 80 days, in the knowledge there are queues, cancel warrants to get free storage.
Consumers are also prevented from getting metal in LME warehouses with queues when they need it.
Rent-capping has failed to stop the queues, which resumed last year after a large delivery of aluminium to ISTIM’s facilities in Port Klang for a rent-sharing deal between the warehouse firm and the company depositing the metal.
In response to a request for comment, the LME said only: “The LME has a comprehensive set of rules around queues, including a specific provision which caps the amount of rent which can be charged in a queue. As we have said previously, the LME keeps its warehousing rule sets under review.”
The LME introduced QBRC after the wait to take aluminum out of LME registered warehouses in Vlissingen in the Netherlands soared to two years and to 700 days in Detroit in 2014, which created artificial shortages and high prices for consumers on the physical market.
The queues this time are significant, although shorter.
In May last year, when the queue emerged, the wait time to take delivery of aluminium from ISTIM’s warehouses in Port Klang was 253 days. At the end of last year, it was still 163 days.
Most of the aluminium in Port Klang was produced in India rather than Russia. Many Western consumers have refused to buy metal produced in Russia, after its invasion of Ukraine in February 2022.
PERCENTAGE ‘LOAD-OUT’
The sources, who spoke on condition of anonymity because they were not authorised to speak publicly, said one alternative to QBRC would be to stipulate the percentages of metal that would have to leave the warehouse, or be loaded out, within a certain period.
They said no numbers had yet been floated.
The concept would align with the principle the LME is the market of last resort for consumers, producers and traders with contracts to sell or buy metal, and that LME warehousing must be efficient for the physical industry.
Percentage load-out would oblige warehouse keepers to ensure they can load out required percentages of their total inventory, meaning they would have to limit the quantity of metal in their storage facilities.
It would also bring the LME in line with aluminium on the commodity exchange COMEX, which requires its approved warehouses to deliver out 2% of their total stocks of the metal.
Aluminium, used in transport, construction and packaging, is the world’s largest non-ferrous produced metal market and the LME’s highest volume contract.
OPPOSITION LIKELY
The sources said they expected opposition to percentage load-out rules from firms whose business models focus on earning rent by storing large amounts of metal.
Replacing QBRC would also make redundant the LME’s load-in load-out rule (LILO), which specifies the tonnage that has to be shipped out when a queue is longer than 50 days and simplify warehouse regulations.
Other potential changes the LME is expected to consult on are the banning of agreements known as “rent deals” that allow warehouses to share rental income with companies that deliver metal to them, the sources said.
The firm that delivers the metal to a warehouse does not have to retain ownership under the rent deals, but still gets a share of the rent as long as the metal stays in the warehouse, and the fees are paid by the new owners of the metal.
Three of the sources said the LME also wanted some control over warehouse charges, such as those for handling, warranting and rewarranting.
(Reporting by Pratima Desai, additional reporting by Polina Devitt; editing by Veronica Brown and Barbara Lewis)
