LME warehouse shake-up to spur competition, new locations
* Independent storage operators due for resurgence
* Dominated by big groups such as Goldman Sachs, Glencore
* New warehouses set to open in U.S., Netherlands
By Eric Onstad and Josephine Mason
LONDON/NEW YORK, Nov 21 (Reuters) - Sweeping warehouse rule changes proposed by the London Metal Exchange will spur a resurgence of independent storage firms after several years of dominance by big groups such as Goldman Sachs and Glencore Xstrata.
The LME, the world's biggest industrial metals marketplace, announced a tougher warehouse policy on Nov. 7 to cut queues for delivery to a maximum of 50 days from over a year in some cases, after persistent complaints from metal buyers.
Independent storage companies and their warehouse networks have been marginalized in recent years as the major groups have generated business by offering incentives to create queues.
Dutch firm Independent Commodities Logistics B.V. plans to take advantage of the proposed changes.
"Indeed we hope to benefit from the changes in LME rules," Managing Director Hans Cleton told Reuters.
"Some of the companies we have discussed this issue with ... are looking for an alternative and neutral place of storage so that the queues are not continued."
The Dutch company, which has an LME-registered warehouse in the port of Rotterdam, has applied to the exchange to open a facility in Moerdijk, which the exchange recently added as a new location.
In recent years, the bulk of LME metal stocks gravitated to a handful of locations dominated by banks and trading houses, all of which also trade metals on the exchange.
Those include warehouse firms owned by banks Goldman Sachs and JP Morgan Chase and by commodity trading groups Glencore Xstrata and Trafigura.
These big players made incentive payments upfront to attract large volumes of metal to their warehouses, which earned lucrative rentals from the long queues. LME rules allowed warehouses to deliver out only a small fraction of what they could take in.
Five locations where these big firms are active account for 70 percent of total LME inventories.
Analysts expect the new LME rules to drive incentives down, even if this may be a slow process.
"With incentives falling by the wayside, smaller companies will be better positioned to compete with the bigger players," analyst Leon Westgate at Standard Bank said in a note.
One firm likely to benefit is C. Steinweg Group, the biggest independent warehouse firm, which operates LME warehouses in 18 locations but not in those with the longest queues. Steinweg has a policy of not commenting to the media.
In another move, the LME also has approved new warehouse locations, which could give scope for independent operators such as Cleton's ICL to gain business.
The main thrust of the move, however, was to head off potential logistics problems caused by the rule changes, industry sources said.
Within days of publishing the new rules, the LME gave the green light to Moerdijk in the Netherlands and Owensboro, Kentucky in the United States.
Moerdijk and Owensboro are not far from the two existing locations with the most severe log-jams - Vlissingen and Detroit - each of which have around 1 million tonnes of aluminium waiting to be delivered, with queues of over a year.
From April 1, if the LME finalises its proposed changes, warehouses with queues over 50 days will have a choice between refusing to accept fresh deliveries or stepping up deliveries.
This limitation could raise the prospect of market chaos if a short-seller on the LME were blocked from quickly arranging to ship metal to a warehouse to satisfy its market position.
"If you can't put metal on warrant in Vlissingen, now you've got Moerdijk. In the U.S., Chicago, Toledo and Detroit are all tied up, Baltimore's a long way away, so where do you go?" a warehousing source said.
The LME said the approval of new locations was not specifically linked to the new rules. "We are constantly reviewing the reach of our warehousing network and add to it where appropriate," spokeswoman Miriam Heywood said in an email reply to a query.
Independent warehousing firms are likely to be keen on the new locations, including at Owensboro, a big inland port which is located near the downstream aluminium industry.
"The fact they're so close means metal will probably move down the road to them, probably to new competitors. To have more warehouses in different areas with the 50-day rule will level the market out," a metals trading executive said.
The major storage groups also could take advantage of the new locations to keep generating rental income from existing queues while accepting new arrivals in the new locations.
Another new U.S. location in Panama City, Florida, can serve as an alternative to New Orleans, where dealers say the wait time for metal can be months.
Warehouses in New Orleans currently account for around half of the zinc and more than a third of the copper stocks waiting to be delivered.
The LME gave approval this month to small UK warehousing company Scale Distribution, part-owned by Australia's Macquarie Group, to store copper in Panama City.
In the longer term, warehouse operators may find more opportunities in China, said Nic Brown, head of commodities research at Natixis in London. The LME is owned by Hong Kong Exchanges and Clearing Ltd.
"We strongly suspect that the reason why the LME is addressing warehouse queues is in order to allow it to open new warehouses in mainland China. This may offer new opportunities for expansion by warehousing companies," he said.
- Sierra Leone's chief Ebola doctor contracts the virus
- Gaza bloodshed deepens as airlines shun Israel |
- Ukraine rebel commander acknowledges fighters had BUK missile
- TransAsia Airways plane crashes in typhoon-hit Taiwan, killing 47 |
- South Korea ferry fugitive hid behind cabin wall, bags of cash at hand