London Metal Exchange's bared teeth warn warehouses off steep rent rises
* LME, UK regulator meet with warehousing companies
* LME makes clear it does not want big rent rises
* Steep rises could be flagged for investigation - sources
By Susan Thomas
LONDON, Dec 5 (Reuters) - The London Metal Exchange has showed its teeth to guard industrial users of materials like aluminium against steep rises in charges by owners of warehouses in its global storage network.
Warehousers say this tough new stance is scary enough to work.
One warehouse company source said it had got the message that the world's biggest marketplace for industrial metals, backed by regulators, can cause real inconvenience to any shed operator that defies its wish to curb rents for storing metal.
"I think what would happen is any attempt to raise rents beyond what I could justify on inflation and real costs will be flagged for investigation," the source in Europe said.
"And they don't have to prove that you have done anything wrong but it could take an awful long time to find that out. Do you really want to put yourself through that?"
In theory, a manufacturer of, for example, aluminium cans should be able to use the LME futures market to get hold of metal it needs urgently and pick up the consignment from one of the exchange-registered sheds dotted around the globe.
In practice, warehouse owners found it paid to build up big stocks in some places and then plead logistical constraints to deliver metal to buyers very slowly, meanwhile charging rent.
Brewer and can maker MillerCoors has estimated a more than $3 billion cost to consumers from the delays. About a dozen companies have filed U.S. lawsuits alleging aluminium price fixing by big banks, trade houses and the LME.
The LME, under regulatory and legal pressure over complaints of withdrawal queues of more than a year and large surcharges to withdraw material from warehouses, this year adopted rules slashing maximum wait times to 50 days.
The LME, bought by Hong Kong Exchanges and Clearing for $2.2 billion last year, acted after years of complaints.
It gave itself the power to act swiftly to prevent abuses of the system and it will have the authority to probe whether warehouses are manipulating flows of metal to create backlogs.
While shorter queues will help industrial clients, they will curb profits for the banks and trade houses that own many warehouses, including Glencore-owned Pacorini, Trafigura's NEMS and Goldman Sachs' Metro.
At stake are rental incomes that in some cases total hundreds of millions of dollars a year, and some warehousing companies warned of sharply higher charges to compensate for shorter queues, according to sources familiar with the matter.
The LME said last month it had started a legal review of what steps it can take on high storage charges including rent, and was looking with lawyers at how well its agreement with warehouse companies is working.
At the time the exchange's CEO Garry Jones emphasised it would rather rely on regulatory persuasion and self restraint by warehouses than influence what should be a market-driven solution.
NOT MACHO ENOUGH TO TAKE ON LME
Last week the LME and Britain's Financial Conduct Authority (FCA) held a meeting in London and a global conference call with warehouse companies, metals industry sources said.
Sources at the meeting said the LME and FCA had stopped short of threatening legal action against warehousing companies planning sharp rent rises. But they were very persuasive.
"They didn't say 'don't you dare' but they made it very clear that there is regulatory scrutiny, especially for those companies that have queues and are already in the spotlight," one of the sources said.
"And if you're in the spotlight the last thing you want to do is increase your rents by an unreasonable amount."
Warehouse companies set their rents annually and independently of each other, taking into account inflation, macro-economic conditions and LME rule changes.
They submit their proposed rent rates to the LME by Dec. 1 every year before coming into effect the following April.
An LME spokeswoman declined to comment on warehouse rents on Thursday. The LME would release the new rates at the end of December, she added.
While the LME can ask warehouse companies to justify new prices, it has said in the past that it cannot limit rent increases as this would be deemed as price fixing by the European Union and therefore anti-competitive.
Daily rents for LME aluminium, the most widely stored metal, have risen almost 50 percent to a median 47 cents per tonne since 2007/2008, according to Reuters calculations.
They jumped as much as 10 percent for some metals last year to offset an earlier attempt by the LME to cut queues by insisting on higher load-out rates.
Inflation in the euro zone was 0.9 percent in November, and is expected to average 1.1 percent next year.
"The last LME notice sent a pretty clear message. They do not want prices to go up," said a warehousing source in Singapore.
None of the warehousing sources would divulge what rates they had submitted, but all suggested one that took into account inflation, genuine costs resulting from the rule changes and exchange rate fluctuations would be reasonable.
"I don't think anybody is feeling macho enough to take the LME head-on, by putting 20 percent on their rents and (loading charges) and getting sued by the people in their queue at the same time," the first warehousing source said.