Commodity warehouse ownership rules need rethink -report

Tue Jul 9, 2013 2:08pm EDT

* Report likely to add to pressure for LME storage reform

* LME has proposed overhaul

* Commission is working on oversight, pricing investigation

By Barbara Lewis and Susan Thomas

BRUSSELS/LONDON, July 9 (Reuters) - Conflicts of interest over ownership of commodity warehouses can inflate prices of raw materials such as aluminium, a report by two Brussels think-tanks said on Tuesday.

It is likely to add to market pressure to reform the London Metal Exchange's (LME) storage system, in which companies such as Glencore and Goldman Sachs have been able to make profits from holding big inventories.

The report published on Tuesday follows more than a year of data-gathering to assess the relationship between physical raw materials and derivatives markets.

It was carried out by the Brussels-based Centre for European Policy Studies and the European Capital Markets Institute, whose views often feed into debate within the European Commission, the EU executive.

Big industrial metals users, including Novelis which supplies Coca Cola with aluminium beverage cans, have leaned heavily on the LME, which earlier this month proposed a major overhaul. Novelis has also complained to the European Commission.

Firms running warehouses registered by the LME, the world's biggest industrial metals marketplace, have been making money by building up stocks and charging for storage, while they deliver metal at a limited rate to holders of LME contracts.

Manufacturers have struggled to get supplies as they compete with banks and trading houses, which hold huge stockpiles as collateral for finance deals.

Their problems came to a head this year as queues, sometimes lasting months, developed across the LME warehouse network. The queues and the false shortages created by financial buyers have kept physical metal away from industrial buyers, pushing up surcharges or premiums across the market.

Tuesday's study raised the need for greater scrutiny as the delays add to costs, with storage charged at roughly $160 per tonne per year.

"It's pretty clear that part of the queues are artificial," Diego Valiante, one of the report's authors, said.

The Commission is working on new rules for financial benchmarks and is expected to unveil proposals later this year.

The report said that ways to make commodity benchmarks more reliable include greater cross-border coordination and improved data, itemised by type of market participant.

It looked at 11 different commodities markets - crude oil, natural gas, iron ore, aluminium, copper, wheat, corn, soybean oil, sugar, cocoa and coffee.

As well as working on oversight of commodity benchmarks, EU authorities have launched an investigation into alleged price rigging by major oil companies, which has drawn attention to leading price assessment agency Platts.

Tuesday's report said any regulatory framework was likely to maintain voluntary price reporting by commodity firms.

"The objective is to support the reputational market while at the same time avoiding the creation of a legally-binding price assessment process that would only increase the systemic effects of market failures," it said.

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