EC starts preliminary probe into metals storage -sources

LONDON Sun Nov 11, 2012 12:30pm EST

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LONDON Nov 11 (Reuters) - The European Commission is starting a preliminary investigation into steep surcharges and lengthy wait times to get metal from warehouses monitored by the London Metal Exchange, two sources with knowledge of the matter said on Sunday.

The regulations of the LME, which is being acquired by Hong Kong Exchanges and Clearing, allow companies operating warehouses in the global network it registers to release only a small fraction of their inventories each day.

The practice, along with financing deals tying up stockpiles, causes long queues for metal and an artificial tightness in immediate supply. As a result, the premiums industrial buyers pay above the spot price to secure physical delivery have been pushed to record highs.

"The EC is carrying out a preliminary investigation in an attempt to throw light on the queues at LME warehouses," said one industry source with direct knowledge of the matter. "The EC wants to throw light on the malfunction in these markets in order to help metals consumers."

The EC was not immediately available to comment on Sunday. The LME did not return calls requesting a comment.

The LME, the world's biggest base metals marketplace, is currently conducting a six-month review of warehouse load-out rates as it struggles to deal with backlogs popping up across its global warehouse network.

LME Chief Executive Martin Abbott has long argued that warehouse backlogs exist primarily as a result of stocks financing deals, and not as a result of warehouse ownership, nor of LME regulations stipulating the minimum rate of delivery.

The exchange has already raised the minimum load-out rate for warehouses to placate angry users, but is now conducting the review as the bottlenecks and resulting high premiums show little sign of easing.

"Yes, we believe they are looking at it," a second metals industry source said of the EC move. "The situation as it stands cannot continue. It's getting worse. Sure you can get metal, but you're going to have to pay."

Industrial users, such as metals manufacturing companies, usually buy direct from producers on fixed long-term contracts, but if they need extra supply, they have to wait sometimes for over a year in some locations.

They can try their luck on the spot market, but as the warehouses suck in so much metal, there is little available, resulting in a crippling premium to the LME spot prices.

The Hong Kong exchange, which has agreed a $2.2 billion purchase of the LME, has promised to tackle the matter of warehousing. Its chief executive, Charles Li, has acknowledged warehousing as a thorny issue. (Reporting by Silvia Antonioli and Susan Thomas; Editing by Leslie Adler)

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