(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, July 29 On the surface at least, much
has changed in the London Metal Exchange (LME) warehousing
business over the past year.
But take a deeper look, and it is clear that the underlying
structural problems are still there. The exchange has much more
work to do if it wants to rectify a delivery system that has
ruptured relations with some of its users and generated a spate
of lawsuits in the United States.
What the LME has done is add three new delivery locations,
extending its global warehousing network to Kaohsiung in Taiwan,
Moerdijk in the Netherlands and, for copper only, Panama City in
the United States.
Several new operators such as Whelan Metals, BTG Pactual and
Independent Commodities Logistics have joined the ranks of
registered warehousers, while other smaller companies such as
Erus Metals and Scale Distribution have expanded their
The exchange will also take some satisfaction from the
reduction in the number of delivery queues even though its
proposed rule change linking load-in to load-out rates is itself
log-jammed in the UK legal system.
Not yet revealed are the results of logistics and legal
reviews of the LME's warehousing system, commissioned by the
exchange. Either of them could yet prove as significant as the
LME's current assault on the queue model, which had been
exploited so efficiently by Metro at Detroit and Pacorini at the
Dutch port of Vlissingen.
Even after this series of changes, however, the exchange's
physical delivery function is still dominated by a handful of
players and, more problematically, by operators tied to some of
the world's most powerful trading houses.
AS SOME BEAT A RETREAT...
The total number of LME-registered storage units, excluding
those holding steel, contracted marginally over the last 12
months to 666 from 678, primarily due to cuts by those companies
most associated with load-out queues.
Graphic on LME warehouse changes since July 2013:
Graphic on LME warehouse changes since July 2012:
In the case of Impala Terminals, previously known as NEMS
before being rebranded by its owner Trafigura, the attempt to
build a queue at Antwerp never really got off the ground.
A rapid build-out in capacity has gone into reverse, with
the number of Impala sheds at Antwerp falling to 12 from 26 last
July as it scales back its LME ambitions.
Metro, currently owned by Goldman Sachs but with a "for
sale" sign on it, reduced its footprint by 12 units over the
last year, extending a retreat that began two years ago.
It is trimming its presence just about everywhere apart from
its core LME operations in Detroit, where it still runs 27 sheds
with 1.41 million tonnes of metal in them as of the end of June.
Even Pacorini, owned by Glencore, has tempered its previous
capacity surge, reducing the number of storage units in
Vlissingen by 12 to 41. That's still the largest concentration
OF warehouses held in any one location by one company, mirroring
what is still the largest concentration of metal in the system,
2.16 million tonnes at the end of last month.
The pull-back from Vlissingen has been partly offset by its
increased presence elsewhere, particularly in New Orleans where
Pacorini has opened a couple of new units, bringing its total to
Over a two-year timeframe, the largest reduction in
capacity, a net 28 units, has come from Henry Bath. This,
however, doesn't appear to be anything to do with queues, which
it didn't have, but with restructuring prior to a sale. The LME
warehousing unit is included in a package of commodity assets
being sold by JPMorgan to trade house Mercuria.
...OTHERS MOVE IN
Others have moved into or expanded LME warehouse storage,
presumably taking a view that decaying load-out queues at
Detroit and Vlissingen will translate into wider distribution of
This is particularly noticeable in Detroit, where three new
operators have appeared, although Whelan Metals marks more of a
return than a debut. Bill Whelan is credited with being the
original mastermind behind Metro's massive expansion before the
sale to Goldman Sachs in 2010.
Scale Distribution, owned by Macquarie Bank and Orion
Finance, has also opened up shop, extending its bespoke
warehousing model from Liverpool to Motown as well as to Panama
Joining the fray is the new warehousing arm of Brazilian
investment bank BTG Pactual, which has opened units in Detroit,
Owensboro and, most recently, Singapore.
Worldwide Warehousing Solutions (WWS), owned by trade house
Noble Group, is the second-largest operator in Detroit with five
units and 18,100 tonnes of registered metal at the end of June.
WWS hasn't added to that tally in Detroit, but it has
expanded into Antwerp and Vlissingen, lifting its total number
of units to 17 from 10 two years ago.
Erus Metals, jointly owned by Barclays and steel trader
Metalloyd, has also increased its presence in Antwerp, adding
another three units to bring its total in the Belgian port to
But such incremental advances by some of the smaller LME
warehouse operators are overshadowed by those of Steinweg, the
grand-daddy of the LME storage business.
It added a net eight units over the last year, bringing its
total to 175 and reclaiming the top spot from Pacorini, at least
in terms of number of registered sheds if not volume of metal
THE BIG FOUR
Which is symptomatic of the underlying reality of the LME's
It remains dominated by the "big four", namely Steinweg,
Pacorini, Metro and Henry Bath (in that order).
Between them, they currently operate 505 registered LME
warehouses, representing 76 percent of the total.
Moreover, there's a gulf between their scale and that of the
next largest operator. CWT operates 28 units, compared with the
70 run by Henry Bath, the smallest of the big four.
Graphic on ownership of LME warehousing units:
Graphic on storage of LME-registered metal:
This dominance becomes even starker when viewed in terms of
the amount of metal stored, information that is now available to
the market thanks to a new LME report.
As of the end of June, the big four accounted for almost 96
percent of all the metal in the LME system, with Pacorini taking
the lion's share with just over half of the 6.5 million tonnes
either on LME warrant or awaiting load-out.
CWT leads the chasing pack, but with 97,400 tonnes at the
end of June, it is still a long way behind even Henry Bath's
Few of the newer players in the LME warehousing game have
any registered tonnage at all. They may have successfully
attracted metal into their sheds, but if they have done, it will
be earning much less revenue due to the disparity between
storage costs for warranted and non-warranted metal.
This is of course in large part a result of the queue
dynamics perpetuated by Pacorini and Metro, where revenue from
the load-out queue was used to pay incentives to attract more
metal, a strategy in which critical mass simply fed on itself.
That model has been targeted by the LME's new load-out
rules, which already seem to have changed operator behaviour
despite being frozen in legal limbo.
Even as the queues start to decay, however, it is unclear to
what extent the grip of the big four will loosen. If the system
reverts to the older LME warehousing model, in which metal flows
to those offering the most competitive rates, that would still
seem to favour those able to leverage scale, even though a
number of new players are betting they will be able to make
TIES THAT CAN'T BE BROKEN?
Also mitigating against any LME storage revolution is the
continued concentration of ownership in the hands of powerful
metal market players.
Such "tied" operations still account for 62 percent of
registered units, a figure that has dropped only marginally from
64 percent a year ago.
Steinweg, by the way, is counted as an "independent" despite
its historically opaque group ties with physical trade house
Raffemet. Insiders contest that all links have now been broken,
so the benefit of the doubt should be given.
As of the end of June, Steinweg held 870,000 tonnes of
registered metal. Other independent warehouse operators held
between them just 126,000 tonnes. Most didn't hold anything at
There is no suggestion that the LME's strict "Chinese
walls", prohibiting the flow of sensitive information between
warehousing and trading operations, don't work. But they don't
assuage the widely held perception that there is something
intrinsically wrong with, for example, Glencore's ownership of
the company that currently stores more metal than anyone else in
the LME system.
It remains to be seen where Metro will end up or whether
Mercuria will stick with Henry Bath, but it is clear that the
likes of BTG Pactual view LME warehousing as an adjunct to the
physical trading business.
Such linkages work against greater competition in the LME
warehousing space, since these are the players who have most
metal to store. Doing so in a related company reduces storage
costs to little more than a balance-sheet transfer within the
greater profit-and-loss scheme of things. A truly independent
operator has no such built-in advantage.
The LME doesn't have much legal leeway to change this aspect
of warehousing. We'll get to find out exactly how much when it
releases its legal review.
But it does underline the fact that forcing the end of the
queues may only be a small first step towards reshaping the
exchange's warehousing landscape.
With all the recent arrivals, LME warehousing may look more
competitive, but the domination of the big four, three of which
are owned by trading entities and one of which was until
recently connected with a trading company, says it isn't.
(editing by Jane Baird)