* Detroit queue will take 2 years to disappear - analyst
* Analyst warns of greater volatility, lower liquidity in
By Josephine Mason
MIAMI, Nov 13 The London Metal Exchange's rules
overhaul will not solve its four-year warehousing crisis
overnight, an LME executive warned, while an analyst said the
measures could increase volatility and hurt liquidity in the
exchange's top-volume contract aluminum.
Under pressure from angry endusers, including brewer and can
maker MillerCoors LLC , who say LME warehousing
policies have led to years-long wait times to take delivery of
metal and inflated physical prices, the exchange last week said
it would slash the maximum queues for metal.
The LME's storage practices have drawn scrutiny from U.S.,
EU and British regulators.
In the latest plan, warehouses with years-long queues would
have to release more stocks once the wait time breaches 50 days,
rather than the 100 days proposed in July.
Still, "it's not going to happen overnight," LME head of
strategy and implementation, Matthew Chamberlain, told delegates
at the American Copper Council annual conference on Wednesday.
The latest measures won't come into effect until April 2014
and even then it might take years for the queues to disappear.
Barclays Capital base metals analyst Nicholas Snowdon said
it will take two years for the aluminum queue in Detroit to
vanish. The Detroit warehouses hold over a quarter of the LME's
5.3 million tonnes of aluminum stocks.
Lawsuits have been registered against warehouse owners,
including Goldman Sachs, JPMorgan Chase & Co,
Glencore-Xstrata and Trafigura, of artificially
inflating waiting times and lines to boost rents for warehouse
owners and drive metal prices higher.
Seven locations out of the LME's more than 30 will be
affected by the rule changes: Vlissingen and Rotterdam in the
Netherlands, Antwerp in Belgium, Detroit and New Orleans in the
United States, Johor in Malaysia and Singapore, Snowdon said.
In the near term, the latest measures have pressured
physical aluminum prices as warehouse companies have reined in
incentives paid to traders to store metal in their facilities.
Premiums, which are paid on top of the LME price for
physical delivery, have fallen to around 9 cents per lb in the
U.S. Midwest from record highs of 12 cents before the LME first
announced plans for sweeping changes in July.
When buying metal, industrial users are forced to match
those incentives to prevent metal being lured into storage in
While incentives have been quietly curbed, financing deals
are not expected to disappear any time soon, supporting premiums
and potentially roiling the market as traders are now being
enticed by cheaper offers for storage outside of the exchange.
Low rents are particularly attractive for so-called cash and
carry deals which keep metal off the market for years at a time.
Alongside a wide forward price structure and low borrowing
costs, those deals are now more profitable than before, Snowdon
said, and have already lured large tonnages of aluminum into
storage outside of the exchange.
"Nothing's changed. The metal's still not going to
consumers," said one market source, referring to the big
drawdowns in LME stocks.
The average rent of LME storage is around 47 cents per tonne
of metal per day, while the non-exchange storage costs are
Snowdon said that is evident in the faster pace at which
traders have canceled stock in Detroit, effectively putting
warehouse on notice that they want to take delivery of metal.
Detroit aluminum stocks have fallen 5 percent since July and
over 70 percent of the 1.4 million tonnes of aluminum there is
due to be delivered out.
Most LME-registered warehousing companies run off-exchange
facilities, often in the same locations in which they operate
under the LME.
"One concern is the trend of off warrant metal will promote
volatility and less transparency in stocks," Snowdon said.