* New rule to only modestly cut wait times, industrial users say
* Copper shifts between warehouses; snapped up in financing deals
By Susan Thomas and Eric Onstad
SANTIAGO/LONDON, April 12 (Reuters) - 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 Clearing (HKEx).
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 said.
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 materials.
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 Glencore/Pacorini.”
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.”