* CME sounds out Chile as location for copper warehouses
* CME's copper futures contract eats into LME market share
* LME dominates but warehouse system frustrates end-users
By Susan Thomas and Josephine Mason
LONDON/NEW YORK, April 5U.S. exchange operator CME Group is sounding out Chile as the location for a network of warehouses as its copper contract takes market share from the London Metal Exchange, sources familiar with the matter said.
The CME's COMEX contract, often overlooked outside of North America, is eating into the LME's dominance of the global market for copper futures as end-users become increasingly frustrated with the 135-year-old exchange's handling of its warehousing policy.
The trading houses and Wall Street banks that own many LME-registered warehouses are locking metal down in financing deals and releasing only small quantities. Long queues for delivery of metal have put it out of industrial users' immediate reach and undermined the LME as a market of last resort.
Volume growth of the CME contract has prompted the U.S. exchange to look beyond its U.S home territory, and it floated the idea of Chile as a location to members and clients, a source familiar with the discussions said.
"(The CME) talked about it, looked at the benefits," the source said, ahead of the CESCO industry copper conference in Santiago next week.
CME declined to comment on any warehousing plans, but Robert Ray, managing director of the International CME Group, said the company was engaging "closely with customers and members and continually looking at ways to expand and enhance our portfolio of benchmark metals products".
Industry sources said the talks on adding Chile to CME's warehousing network demonstrated the exchange's determination to push the contract into global territory.
"They are trying to compete with the LME and are being reasonably successful at the moment. I think they are growing their market share, and this is part of that policy," a metals industry executive said.
He added that the CME's interest in Chile was not directly related to the frustration with the queues at LME warehouses. "I think this is simply where they can expand their business."
The LME's vast warehousing network includes over 700 facilities in 14 countries located in areas of net consumption. The exchange monitors but does not own the facilities, which take delivery of physical metal against futures contracts.
The CME's capacity is much smaller, with 13 U.S. facilities in Tucson, Arizona; New Orleans, Louisiana; Baltimore, Maryland; Toledo, Ohio; Amarillo and El Paso in Texas and Tooele, Utah.
Over the past four years, CME has been steadily chipping away at the LME's near-monopoly of global copper futures, but the pace accelerated last year, according to Reuters calculations based on data from exchanges.
Turnover on all three of the world's main copper futures contracts - LME, COMEX and the Shanghai Futures Exchange (ShFE) - rose last year, but the U.S. and Chinese exchanges grabbed market share from London.
Based on average monthly volume of the three measured in tonnages, the COMEX contract's share of the market increased to 13 percent from 11.7 percent in 2011.
Its monthly volumes rose by 30 percent to an average of 15.3 million tonnes from 11.8 million in 2011.
This week COMEX open interest, a reflection of a market's liquidity, hit a fresh all-time high of 185,531 lots on Wednesday, beating its previous record set on Feb. 6. That equates to 2.1 million tonnes of copper, still just under a fifth of the LME's copper contract, the second most active behind aluminium.
"Over the past year we have seen tremendous growth in COMEX Copper," the CME's Ray said. "Market participants are gravitating to our fully transparent market that allows our clients to better manage their price discovery and risk management needs."
London still dominates the global market. Its monthly futures average trading volumes measured in tonnages rose by 4 percent to 74 million tonnes in 2012 from 72 million in 2011.
But its grip is loosening, and its market share fell to 66 percent from 71 percent in 2011, according to Reuters calculations.
An LME spokeswoman said its share of the copper futures market, including its mini contracts, amounted to 71 percent in December.
If CME does register warehouses in Chile, the world's largest producer of copper, the move would buck the LME's policy of locating storage facilities in areas of consumption, rather than production.
"The LME system has become so bent out of shape, I don't know if having warehouses close to areas of consumption is really a valid argument anymore," a third metals industry source said.
While copper inventories in LME-registered warehouses are at a 10-year high, most of that is stuck in just three locations: Antwerp in Belgium, Johor in Malaysia and New Orleans, which together account for 72 percent of total LME stocks.
In those locations, trading houses have embarked on a strategy to lock up metal to earn lucrative warehouse rentals and premiums that users must pay to take delivery.