* Report likely to add to pressure for LME storage reform
* LME has proposed overhaul
* Commission is working on oversight, pricing investigation
By Barbara Lewis and Susan Thomas
BRUSSELS/LONDON, July 9 Conflicts of interest
over ownership of commodity warehouses can inflate prices of raw
materials such as aluminium, a report by two Brussels
think-tanks said on Tuesday.
It is likely to add to market pressure to reform the London
Metal Exchange's (LME) storage system, in which companies such
as Glencore and Goldman Sachs have been able to
make profits from holding big inventories.
The report published on Tuesday follows more than a year of
data-gathering to assess the relationship between physical raw
materials and derivatives markets.
It was carried out by the Brussels-based Centre for European
Policy Studies and the European Capital Markets Institute, whose
views often feed into debate within the European Commission, the
Big industrial metals users, including Novelis which
supplies Coca Cola with aluminium beverage cans, have leaned
heavily on the LME, which earlier this month proposed a major
overhaul. Novelis has also complained to
the European Commission.
Firms running warehouses registered by the LME, the world's
biggest industrial metals marketplace, have been making money by
building up stocks and charging for storage, while they deliver
metal at a limited rate to holders of LME contracts.
Manufacturers have struggled to get supplies as they compete
with banks and trading houses, which hold huge stockpiles as
collateral for finance deals.
Their problems came to a head this year as queues, sometimes
lasting months, developed across the LME warehouse network. The
queues and the false shortages created by financial buyers have
kept physical metal away from industrial buyers, pushing up
surcharges or premiums across the market.
Tuesday's study raised the need for greater scrutiny as the
delays add to costs, with storage charged at roughly $160 per
tonne per year.
"It's pretty clear that part of the queues are artificial,"
Diego Valiante, one of the report's authors, said.
The Commission is working on new rules for financial
benchmarks and is expected to unveil proposals later this year.
The report said that ways to make commodity benchmarks more
reliable include greater cross-border coordination and improved
data, itemised by type of market participant.
It looked at 11 different commodities markets - crude oil,
natural gas, iron ore, aluminium, copper, wheat, corn, soybean
oil, sugar, cocoa and coffee.
As well as working on oversight of commodity benchmarks, EU
authorities have launched an investigation into alleged price
rigging by major oil companies, which has drawn attention to
leading price assessment agency Platts.
Tuesday's report said any regulatory framework was likely to
maintain voluntary price reporting by commodity firms.
"The objective is to support the reputational market while
at the same time avoiding the creation of a legally-binding
price assessment process that would only increase the systemic
effects of market failures," it said.