London Metal Exchange's warehousing plan fails to entice
* Metals industry enthusiasm wanes for rule changes
* 100-day waiting time to get metal seen as too long
* Rent curbs suggested, but difficult for LME to implement
By Emma Farge
GENEVA, Sept 20 (Reuters) - The London Metal Exchange (LME) may have to return to the drawing board as enthusiasm wanes for its third attempt in as many years to head off a crisis over its warehouse system.
Storage firms owned by big banks and trade houses have made money by building stocks in LME-registered warehouses and allowing queues to grow for clients seeking to withdraw material, all the time charging rent.
End-users say that has caused waiting times of more than a year, distorting supplies and inflating physical prices to record highs - especially for aluminium, which is in oversupply.
The LME proposed in July that any warehouse with waiting times of more than 100 days be required to link the rate at which it loads out material to the rate at which the facility brings in new metal.
The 136-year-old exchange hopes the move will solve the crisis over a policy that has drawn scrutiny from UK and U.S. regulators and ease frustration among industrial users, including beer and can maker MillerCoors LLC and Novelis, which manufactures sheet used to make cans.
But the proposal drew a muted reaction at the Metal Bulletin aluminium conference in Geneva this week, as the LME's three-month industry consultation on the plan draws to an end.
The deadline for submitting comments is Sept. 30.
"I don't know if these proposals will work. To my mind, the solution has to be much more simple," Kevin Moore, president of All Raw Materials Consulting, told Reuters on the sidelines of the conference.
"You've got to somehow make sure the warehouses do not have a vested interest ... Many are saying the traders will find a way to make more money out of the new system," Moore, a former purchasing manager at General Motors, said.
Warehouses with more than 900,000 tonnes are currently required to load out metal at a minimum rate of 3,000 tonnes per day, regardless of how much is delivered into the facility.
Since 2010, companies including Goldman Sachs, JPMorgan, Glencore-Xstrata and trade house Trafigura have owned warehousing firms, running a lucrative business building up big aluminium stocks, charging rent to store the metal and delivering it only at a limited rate.
A Goldman representative was on the LME's board before Hong Kong Exchanges and Clearing bought the exchange last year. The warehousing units of Goldman, JPMorgan and Glencore-Xstrata are still on the LME's warehousing committee.
The London-based futures exchange oversees a global warehouse network where its clients can choose to take delivery of consistent-quality metals. The LME earns warehouse fees and a percentage of rent.
Highlighting flaws in the new plan, aluminium consumers say the maximum wait time of 100 days set by the new rules is still too long and could lead a warehouse to refuse to take delivery of new metal or shift metal to non-LME-registered facilities.
Before Goldman bought its Metro warehousing subsidiary in Detroit in 2010, obtaining metal from Metro took six weeks. The current waiting time is around one year. While the metal is kept in the warehouse, Goldman earns rent.
"We look forward to improvements but one of our concerns is that a queue of 100 days is still not acceptable," Alex Jennings, chief purchasing officer of beverage can maker Rexam, told Reuters at the conference.
"It shouldn't be beyond the wit of man to get metal out of a warehouse in a shorter period."
Rexam was among a group of big aluminium-using companies that gave joint public testimony to a U.S. Senate banking committee hearing into bank ownership of physical commodity assets in July.
"It's an important first step although the proposals don't go far enough," a senior metals trader said.
"They could have said to the warehouses that they won't be allowed to get any rent if someone is in a queue. Or they could have delisted certain warehouses not offering good service."
But those suggestions may be hard for the LME to implement. The European Union would deem any move to limit rent increases as price fixing and anti-competitive, the LME has said.
Rents per day for LME aluminium have risen almost 50 percent to a median 47 cents a tonne since 2007/2008, Reuters calculations show.
Meanwhile, premiums that buyers in the spot market have to pay to get metal have risen from $145 per tonne in December 2011 to a record near $300 a tonne in June, although that has fallen slightly in reaction to the LME's proposals.
"For a consumer, there's way more supply than demand but prices aren't coming down and the hedges don't work," All Raw Materials Consulting's Moore said. "For the good of LME, they need to figure out how to remove that stigma."
A final decision on whether to implement the changes is expected to be made at an LME board meeting in October and if approved, the rules would come into force on April 1 next year.
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