LONDON Nov 11 The European Commission is
starting a preliminary investigation into steep surcharges and
lengthy wait times to get metal from warehouses monitored by the
London Metal Exchange, two sources with knowledge of the matter
said on Sunday.
The regulations of the LME, which is being acquired by Hong
Kong Exchanges and Clearing, allow companies operating
warehouses in the global network it registers to release only a
small fraction of their inventories each day.
The practice, along with financing deals tying up
stockpiles, causes long queues for metal and an artificial
tightness in immediate supply. As a result, the premiums
industrial buyers pay above the spot price to secure physical
delivery have been pushed to record highs.
"The EC is carrying out a preliminary investigation in an
attempt to throw light on the queues at LME warehouses," said
one industry source with direct knowledge of the matter. "The EC
wants to throw light on the malfunction in these markets in
order to help metals consumers."
The EC was not immediately available to comment on Sunday.
The LME did not return calls requesting a comment.
The LME, the world's biggest base metals marketplace, is
currently conducting a six-month review of warehouse load-out
rates as it struggles to deal with backlogs popping up across
its global warehouse network.
LME Chief Executive Martin Abbott has long argued that
warehouse backlogs exist primarily as a result of stocks
financing deals, and not as a result of warehouse ownership, nor
of LME regulations stipulating the minimum rate of delivery.
The exchange has already raised the minimum load-out rate
for warehouses to placate angry users, but is now conducting the
review as the bottlenecks and resulting high premiums show
little sign of easing.
"Yes, we believe they are looking at it," a second metals
industry source said of the EC move. "The situation as it stands
cannot continue. It's getting worse. Sure you can get metal, but
you're going to have to pay."
Industrial users, such as metals manufacturing companies,
usually buy direct from producers on fixed long-term contracts,
but if they need extra supply, they have to wait sometimes for
over a year in some locations.
They can try their luck on the spot market, but as the
warehouses suck in so much metal, there is little available,
resulting in a crippling premium to the LME spot prices.
The Hong Kong exchange, which has agreed a $2.2 billion
purchase of the LME, has promised to tackle the matter of
warehousing. Its chief executive, Charles Li, has acknowledged
warehousing as a thorny issue.
(Reporting by Silvia Antonioli and Susan Thomas; Editing by