REFILE-UPDATE 2-LME: rules prevent conflicts with warehousing

Thu Mar 25, 2010 8:43pm EDT

(Refiles to fix story link, paragraph 2)

* LME has no plans to amend warehousing rules

* Steinweg, Pacorini could benefit

* Opportunities for smaller warehouses

(Recasts, adds comment/detail)

By Pratima Desai

LONDON, March 25 (Reuters) - Strict rules are in place to ensure conflicts of interest do not arise in metals warehouses owned by banks or commodity traders, the London Metal Exchange said on Thursday after two recent high-profile purchases.

The LME was responding to a question from Reuters on whether the acquisition of Metro by U.S. bank Goldman Sachs (GS.N) and of NEMS by commodities trader Trafigura could cause problems in terms of access to sensitive information in warehouses. [ID:nSGE61I04Z] [ID:nLDE6200W6]

Metro and NEMS are LME registered warehouse companies.

"The rules and procedures are already in place for ensuring potential conflicts of interest do not arise and there can be severe consequences for non-compliance," it said.

"We have no current plans to amend the rules."

Goldman Sachs declined to comment.

"NEMS will comply with all LME regulations and will continue to operate as an independent company," Trafigura said.

For columns on acquisitions of LME warehouses click on [ID:nLDE61L2E8] [ID:nLDE62E0IG]

For LME warehousing rules click on

here

The idea of a metals trading company owning a warehouse is not new. Henry Bath comes under the umbrella of RBS Sempra, which will soon be absorbed by U.S. bank JPMorgan. (JPM.N).

The acquisition of Metro and Trafigura leaves only three major players -- Netherlands-based C. Steinweg, Italy's Pacorini and Asia's CWT Commodities -- not tied to a trading operation.

The six companies control 82 percent of LME listed warehouses worldwide.

"Steinweg, Pacorini and others will probably benefit as they are still neutral," a warehousing executive said.

Warehousing sources say that one of the three remaining large independent warehouses has been approached.

SENSITIVE

If some producers and consumers avoid using NEMS or Metro, this could be an opportunity for small warehouse companies to expand.

"The problem is you have concentration of warehouse ownership, maybe it's time that changed," said a copper producer.

For a list of LME approved warehouses click on

here

But the producer added LME rules and so-called "Chinese walls" would not allow a flow of sensitive information between warehouses and their new owners.

"Most of the people holding aluminium stocks are banks, they are paying a fortune to warehouses in those financing deals. Warehouses are making some very large margins, that is also part of the attraction."

About 70 percent of aluminium stocks -- 4.59 million tonnes -- in LME warehouses are estimated to be tied up in financing deals to raise cash for producers and earn for banks higher returns then they could elsewhere. [ID:nLDE62726C]

The deals effectively buy nearby aluminium and sell forward, sometimes up to a year, to take advantage of higher prices. Lower storage costs in return for leaving the material longer with warehouses help boost profits.

These deals are earning banks and investors a much higher return then instruments such as the Standard & Poor's GSCI .GSCITR total return commodity index, which is down about 4 percent so far this year.

But the amounts charged by warehouses are still a multiple of the cost -- which also include LME registration fees, insurance and security costs.

"They may make more money from warehousing then they do from trading, especially in these difficult economic times when stocks are so high," a Europe-based warehousing executive said.

Stocks of copper, used in power and construction, in LME warehouses have fallen this month, but in the middle of February they rose above 555,000 tonnes, the highest since 2003.

Aluminium stocks hit a record above 4.68 million tonnes in January. The metal is used in transport and packaging.

The LME said a new company has to pay $5,000 to list one storage facility. "For each additional storage facility there is a charge of $4,000. Furthermore, there is a $5,000 annual listing fee per company per location."

For LME warehouse storage costs click on

here

(Additional reporting by Nick Trevethan; Editing by Anthony Barker)

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