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No overnight solution to LME metal queues - LME executive
November 14, 2013 / 8:41 AM / 4 years ago

No overnight solution to LME metal queues - LME executive

* Detroit queue will take 2 years to disappear - analyst

* Analyst warns of greater volatility, lower liquidity in aluminum

By Josephine Mason

MIAMI, Nov 13 (Reuters) - 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.

OUTSIDE STORAGE

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 financing deals.

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 substantially lower.

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.

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