UPDATE 3-LME says proposal will help metals warehousing problem

Fri Nov 16, 2012 12:55pm EST

* New warehouse rule expected to take effect on April 1

* LME proposal seen as a modest concession

By Silvia Antonioli and Maytaal Angel

LONDON, Nov 16 (Reuters) - The London Metal Exchange (LME) expects proposed changes to its warehousing rules to go some way to solve problems in the network of warehouses it monitors, Chief Executive Martin Abbott said at a news conference on Friday.

The LME proposed on Thursday a rule that warehousing companies that have 30,000 tonnes or more of a single metal in a queue should deliver out as much as an additional 500 tonnes per day of other metals stuck behind it in the queue.

This should alleviate the effect that queues, particularly of aluminium, are having on other metals, the LME said.

The London-based exchange currently allows warehouse operators, including banks and trade houses, to release only a small fraction, up to 3,000 tonnes, of their overall inventories each day.

These rules - along with financing deals that tie up stocks for years and concentrate them in warehouses where rent is cheap - have caused long queues for delivery of metal to consumers and an artificial tightness in immediate supply that pushes up costs.

In some warehouses, outward deliveries of a number of metals are being delayed by an inventory glut in aluminium, which would be described as the dominant metal.

"If 500 tonnes doesn't work, we will review it, but we expect it to work," Abbott said. If adopted, the proposal would come into effect from April 1 next year.

Analysts and traders said the move would not solve the problem of long queues but is nevertheless welcome.

"What it does do is that for a modest amount of metal ... you can get it faster than you might ordinarily have expected given the various queues of metal," Standard Bank analyst Leon Westgate said. "It's a modest concession but we will see how it goes."

The LME, the world's biggest base metals marketplace, has been reviewing warehouse load-out rates as it tries to deal with backlogs appearing across its global warehouse network.

Stocks of metal, particularly aluminium, have built up sharply in recent years in storage hubs around the world. The best known is Detroit, which is dominated by Goldman Sachs' warehouse subsidiary Metro, where the wait time to get metals stretches out for months.

"Unfortunately when it was an isolated incident in Detroit, the LME could have looked at the situation and forced a rule change at that point," said one metals trader.

"But when they said there was nothing wrong and it was really the financiers who are causing the issue, it gave a green light to the other warehouses owned by powerhouses to go out there and create a similar situation," the trader said.

There are now also long wait times in the Dutch port of Vlissingen, where Glencore subsidiary Pacorini is the main operator, and Antwerp, where commodity trader Trafigura's North European Marine Services warehousing unit operates.

MACRO REASONS

Abbott has long maintained that the queues in aluminium are a feature of the low-interest rate economic environment.

Aluminum inventories in LME-registered warehouses are hovering around a record 5 million tonnes, and much of that is held as collateral for financing deals.

Traders or banks buy the metal from producers and then sell it for future delivery to speculators at a profit, taking advantage of the 'contango' structure, in which futures prices are higher than spot prices for immediate delivery.

The current low interest rates are important in striking a profitable deal.

"We regard the presence of the aluminium queues as being a feature of the macroeconomic environment and not something that we can change," Abbott said.

"However, there is a danger that those aluminium factors may have an effect on other markets, which are not actually subject to the same macroeconomic factors."

The problem has caught the attention of the European Commission, which is gathering information on the issue, industry sources have told Reuters.

Abbott said the commission had not approached the LME with any questions but added, "the door is open".

One way to pacify customers stung by the steep surcharges to get physical supply, which have resulted from the backlogs, would be to hedge those premiums, and banks are in talks on offering such a derivative.

Abbott said the LME had chatted with consumers about premium contracts but did not believe that it would be a liquid enough market, while plans by banks to offer over-the-counter solutions could work well as they can offer bespoke products.

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