(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON May 13 The London Metal Exchange (LME) has just released the first of its promised new reports, detailing registered stocks by warehouse operator and the length of load-out queues at affected locations.
Cue, pun intended, a collective sigh of relief from the analyst community who have up to now had to guess-timate queue length based on the LME's previous per-location data.
Indeed, up to now the only way of ascertaining for sure how long it would take between cancelling an LME warrant and receiving the metal at queue-jammed locations was to actually cancel some metal. Anecdotally, this is just what some of the market's biggest players have been doing, using single-lot cancellations to test queue length.
Now, we all get the same information, albeit only on an end-month basis. The LME is still sensitive to releasing higher-frequency information lest it give more sophisticated operators an information advantage.
That in itself is a big step forward and a long overdue one. Given the problem of queues has dogged the LME for several years, it seems extraordinary that it has taken so long for the exchange to actually confirm something as basic as waiting time.
Beyond that, the first report has some good news and some bad news for the LME.
The good news is that the number of queue-affected locations has fallen from five to four and that the number of locations with queues in excess of 50 days is just two.
The bad news is that the report reveals how a small number of warehouse operators control just about all the exchange-registered stocks, underlining the lack of effective competition in the LME warehousing space.
AND THEN THERE WERE TWO
When the LME first unveiled its package of reforms to its creaking warehouse system back in July 2013, there were five locations experiencing long load-out queues.
Now there are just four, Johor in Malaysia dropping off the list.
Moreover, there are just two locations with queues in excess of 50 calendar days, the threshold for the LME's proposed load-in-load-out formula for forcing queue decay. That proposal is now on ice as the exchange appeals a UK High Court ruling that its consultation process was flawed.
No surprises that the two are Vlissingen in the Netherlands and Detroit in the U.S, both of which have more than a million tonnes of aluminium awaiting physical load-out.
Vlissingen is "owned" by Pacorini, the warehousing arm of Glencore. The report reveals the full extent of its dominance in what was once a Dutch fishing port. Only one other operator, Worldwide Warehouse Solutions (WWS), holds any metal and that just 300 tonnes. The rest of the 2.24 million tonnes sitting in Vlissingen at the end of April was in Pacorini sheds.
The aluminium load-out queue at Vlissingen was 748 calendar days at the end of last month. That for other LME-registered metals, excluding nickel, tin and steel, which have separate load-out requirements, stood at 63 days.
Detroit is where the queues first began and it will still take 683 days to get aluminium out of sheds operated by the dominant operator, Metro, owned by Goldman Sachs. The queue for other metals is 186 days.
Both Pacorini and WWS have some foot-hold in Detroit but held just 33,930 tonnes between them at the end of April, compared with the 1.56 million tonnes in Metro sheds.
The other two locations to feature in the LME's report are New Orleans and Antwerp.
Pacorini held almost 89 percent of the registered tonnage (much of it zinc) in New Orleans at the end of April, with Metro accounting for the balance. The Pacorini queue stood at 44 days for all metals, implying no "dominant" queue.
A similar situation exists at Antwerp where the "all-metal" queue at Impala Terminals, the warehousing arm of Trafigura, was 27 days.
But Impala has been beating a steady retreat from the LME warehousing business and that figure is likely to fall fast.
Impala held just 42,761 tonnes of registered tonnage in Antwerp at the end of April with 27,494 tonnes of that awaiting load-out, a fraction of the tonnages involved at the other three locations. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on LME stocks by warehouse operator: link.reuters.com/bud39v Graphic on LME warehouse rent since 2000: link.reuters.com/gaj56v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Perhaps more revealing than the queue length at specific operators was what the new report says about the broader LME warehousing landscape.
It is a landscape largely dominated by just four players, namely Pacorini, Metro, Steinweg and Henry Bath, the latter one of the assets included in JP Morgan's sale of its physical commodities business to Mercuria.
Between them they were storing just over 95 percent of all LME-registered metal at the end of April.
Dominant among the dominants is Pacorini, which was storing almost half of all LME stocks.
This is in part a direct consequence of the load-out queues. Both Pacorini and Metro used rental revenues from the queues to finance incentives to attract more metal, outbidding those without similar critical mass.
The LME's load-in-load-out formula was conceived as a way to break this vicious circle and although it is currently on hold pending legal appeal, Metro seems to have changed its behaviour accordingly.
No metal went onto LME warrant at Metro sheds in Detroit last month, confirming suggestions that Goldman Sachs, deluged by negative publicity and a flurry of lawsuits, has clipped its warehousing arm's wings.
Pacorini, however, may prove harder to tame.
Its sheds in Vlissingen took in 157,025 tonnes of metal in April, outpacing 74,530 tonnes of departures.
But then it probably doesn't need incentives to attract metal since its owner Glencore is a power-house of the physical metals business and likely to view LME warehousing as just one lever in its bread-and-butter business of exploiting physical arbitrage opportunities.
This serves as a reminder that the queues are in part a manifestation of deeper-rooted problems in the LME's delivery function.
Too few operators controlling too much registered tonnage doesn't hold out much promise for an end to years of above-inflation rent increases.
It's worth remembering that the steepest hikes in LME storage and load-out charges for the current financial year to April 2015 were initiated by Steinweg, Metro and Pacorini.
The LME itself understands the problem.
"The challenge for the LME will be to work to restore the position of LME warehousing as an attractive storage mechanism for global metal. The key inhibitor to this at present is the level of rent for LME facilities." ("Public Report of the LME Warehousing Consultation," November 2013).
And the key inhibitor to controlling rent rises is the control exerted by a small handful of dominant warehouse operators.
Still, at least we get full visibility on the scale of that challenge and for that the exchange should be congratulated. (Editing by William Hardy)