* New rule to only modestly cut wait times, industrial users
* Copper shifts between warehouses; snapped up in financing
By Susan Thomas and Eric Onstad
SANTIAGO/LONDON, April 12 A rule change at the
London Metal Exchange (LME) designed to free up more industrial
metals caught in logjams at warehouses is having scant impact,
disgrunted industrial users say.
The LME, the world's biggest marketplace for industrial
metals, imposed new rules on April 1 after criticism that
problems with backlogs at warehouses were spreading from
aluminium and zinc to other metals such copper and lead.
Warehouses in the global network registered by the LME that
have major logjams of one metal - some queues are more than a
year - must now deliver an additional 500 tonnes per day of
other metals that are caught up in the delays.
"If we need material, if there is a spike in production and
we need material relatively quickly, we have on occasion gone to
LME warehouses to source that material. That today can be a
problem for us," Ian Scarlett, vice president metals at copper
fabricator Luvata, said on the side-lines of the CESCO/CRU
copper conference in Santiago this week.
The rule change, he said, would make little difference.
Industrial users say wait times have not improved enough
after another rule change for warehouses last year and are
skeptical that last week's change will help ease months-long
queues at storage facilities.
Backlogs are lucrative for owners of warehouses such as
trade house Glencore and bank Goldman Sachs as
the metal waiting to be delivered earns storage fees.
Analyst Duncan Hobbs at Macquarie in London has estimated
that the latest rule change will reduce the queue to access
other metals in Detroit, which has long backlogs of aluminium,
to 201 working days from 346 days.
"It could still take several months to access the next unit
of other metals in these locations - which, for many industrial
consumers and especially just-in-time manufacturers, may not be
a practical proposition," he said in a note.
In the Dutch port of Vlissingen, where warehouses are
dominated by Glencore's subsidiary Pacorini, some 1.72 million
tonnes of aluminium have piled up, creating a backlog to access
metal of about 15 months.
Since the LME announced its rule change in November,
however, stocks of zinc in Vlissingen have quadrupled to 55,475
tonnes, with a sharp influx since February. Inventories of lead
at the same location have more than doubled to 49,950 tonnes in
the same time.
The LME was bought last year by Hong Kong Exchanges and
An inadvertent effect of the new rule has been that more
copper is being transferred between rival warehouse facilities
as part of financing deals that have dominated the LME's
warehousing network for the past several years, industry sources
LME Chief Executive Martin Abbott said this week in Santiago
the rule change may have increased the amount of copper locked
up in financing deals.
Using cheap financing due to low interest rates, traders
agree to store their excess metal in long-term rent deals and
sell it forward at a higher price due to a healthy forward
prices spread. These deals are known as cash-and-carries.
With metal locked down in financing deals, industrial users
are angry because the perceived lack of availability of metal
has pushed up the costs for them to secure critical raw
Analysts estimate that about 6 million tonnes of base
metals, which is about 80 percent of total LME stocks, are in
financing deals or tied up in warehouse backlogs. At just under
600,000 tonnes, LME copper stockpiles are now at 10-year highs.
The big inflows into LME-registered warehouses are partly
due to more availability of supplies as industrial demand
remains sluggish but also driven by incentive fees offered by
warehouses, such as Pacorini, to attract metal into their sheds.
"The intended beneficiaries (of the LME rule change) are not
the ones who will benefit. Instead of making more metal
available, it will concentrate more metal in the hands of fewer
players. So it's just the opposite," a warehouse source said.
"It means non-Glencore warehouses are not competitive and
metal will be flushed out and probably head to
A month before the LME announced its latest rule change,
HKEx Chief Executive Charles Li said he may have to "get a
bazooka out to solve the problem" of queues if the LME system
was making clients suffer.
"The LME's new rules are well intentioned, and there is a
limit to what they can do. But are they enough? Is it not just
too easy for these big players to do something about it?" a
banking source said.
"Charles Li said he was going to take a bazooka to the
queues. I would suggest it's slightly closer to a water pistol."