* New warehouse rule expected to take effect on April 1
* LME proposal seen as a modest concession
By Silvia Antonioli and Maytaal Angel
LONDON, Nov 16 The London Metal Exchange (LME)
expects proposed changes to its warehousing rules to go some way
to solve problems in the network of warehouses it monitors,
Chief Executive Martin Abbott said at a news conference on
The LME proposed on Thursday a rule that warehousing
companies that have 30,000 tonnes or more of a single metal in a
queue should deliver out as much as an additional 500 tonnes per
day of other metals stuck behind it in the queue.
This should alleviate the effect that queues, particularly
of aluminium, are having on other metals, the LME said.
The London-based exchange currently allows warehouse
operators, including banks and trade houses, to release only a
small fraction, up to 3,000 tonnes, of their overall inventories
These rules - along with financing deals that tie up stocks
for years and concentrate them in warehouses where rent is cheap
- have caused long queues for delivery of metal to consumers and
an artificial tightness in immediate supply that pushes up
In some warehouses, outward deliveries of a number of metals
are being delayed by an inventory glut in aluminium, which would
be described as the dominant metal.
"If 500 tonnes doesn't work, we will review it, but we
expect it to work," Abbott said. If adopted, the proposal would
come into effect from April 1 next year.
Analysts and traders said the move would not solve the
problem of long queues but is nevertheless welcome.
"What it does do is that for a modest amount of metal ... you
can get it faster than you might ordinarily have expected given
the various queues of metal," Standard Bank analyst Leon
Westgate said. "It's a modest concession but we will see how it
The LME, the world's biggest base metals marketplace, has
been reviewing warehouse load-out rates as it tries to deal with
backlogs appearing across its global warehouse network.
Stocks of metal, particularly aluminium, have built up
sharply in recent years in storage hubs around the world. The
best known is Detroit, which is dominated by Goldman Sachs'
warehouse subsidiary Metro, where the wait time to get
metals stretches out for months.
"Unfortunately when it was an isolated incident in Detroit,
the LME could have looked at the situation and forced a rule
change at that point," said one metals trader.
"But when they said there was nothing wrong and it was
really the financiers who are causing the issue, it gave a green
light to the other warehouses owned by powerhouses to go out
there and create a similar situation," the trader said.
There are now also long wait times in the Dutch port of
Vlissingen, where Glencore subsidiary Pacorini is the
main operator, and Antwerp, where commodity trader Trafigura's
North European Marine Services warehousing unit operates.
Abbott has long maintained that the queues in aluminium are
a feature of the low-interest rate economic environment.
Aluminum inventories in LME-registered warehouses are
hovering around a record 5 million tonnes, and much of that is
held as collateral for financing deals.
Traders or banks buy the metal from producers and then sell
it for future delivery to speculators at a profit, taking
advantage of the 'contango' structure, in which futures prices
are higher than spot prices for immediate delivery.
The current low interest rates are important in striking a
"We regard the presence of the aluminium queues as being a
feature of the macroeconomic environment and not something that
we can change," Abbott said.
"However, there is a danger that those aluminium factors may
have an effect on other markets, which are not actually subject
to the same macroeconomic factors."
The problem has caught the attention of the European
Commission, which is gathering information on the issue,
industry sources have told Reuters.
Abbott said the commission had not approached the LME with
any questions but added, "the door is open".
One way to pacify customers stung by the steep surcharges to
get physical supply, which have resulted from the backlogs,
would be to hedge those premiums, and banks are in talks on
offering such a derivative.
Abbott said the LME had chatted with consumers about premium
contracts but did not believe that it would be a liquid enough
market, while plans by banks to offer over-the-counter solutions
could work well as they can offer bespoke products.