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Financials

CORRECTED-UPDATE 1-LME to explore capping warehouse charges

(Corrects FOT comparison in paragraph 4)

LONDON, Feb 29 (Reuters) - The London Metal Exchange on Monday confirmed its intention to explore the idea of capping warehouse rent because the proposed rises from April are much higher than in previous years.

The LME said it plans to publish a discussion paper outlining its options on “Charge Capping” in mid-March. “The LME is proposing, at a minimum, to explore the possibilities for implementing a longer term solution to high charges.”

The stock-weighted average increases of 7 percent for rents compare with 3 percent the previous two years, and 9 percent for “free on truck” (FOT) charges up from 2 percent.

The new average rent rise is lower than the 10 percent originally calculated in December, before the exchange gave its approved warehouses a one-off chance to cut the charges. The average FOT charge is now 9 percent compared with 12 percent.

The 138-year-old exchange, owned by Hong Kong Exchanges and Clearing Ltd, said the process had created uncertainty and would not be repeated in future years. However, it is not clear if the LME can impose caps.

“(The underlying problem is) the market will remain susceptible to this issue while the LME does not have the power to limit the rent and FOT rates submitted by warehouse operators,” the LME said.

“The LME has no reason to assume that, in the absence of any substantial change, the market will not encounter the same, or a similar problem, during the next and/or future rate setting cycles.”

The world’s oldest and largest market for industrial metals has introduced a series of reforms to its approved global network of more than 650 storage depots in 38 locations, aimed at easing backlogs in withdrawing metal.

The delays have meant fat profits for some warehouse owners who collected rent as long queues built up.

Customers including industry consumers have protested about paying high rents while waiting for delayed deliveries.

“They have yet to introduce rent capping, so it’s still very preliminary. It’s not entirely clear whether that’s in the legal framework of the LME,” said Standard Chartered analyst Nicholas Snowdon.

“Ultimately metal holders will vote with their feet and any warehouses that charge significantly higher levels than others will at the very least see relatively lower deliveries, so there will be a market solution.”

From May, the LME will introduce a queue-based rent cap (QBRC), which means that the rent payable on metal stuck in a queue longer than 30 days drops by half and is eliminated altogether after 50 days.

Additional reporting by Eric Onstad; Editing by Keith Weir

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