LONDON (Reuters) - The London Metal Exchange said on Wednesday it would investigate planned large rises in warehouse rents for 2016-2017 to see if it should cap charges.
The average stock-weighted increase for rents effective from April 1, 2016 is 10 percent, up from three percent the previous year. Free on truck (FOT) charges will rise 12 percent from two percent, the exchange said in a statement.
The announced charges “appear out of line with market comparables and as a result, the increases do not appear to be based on objective economic factors such as increased compliance costs as a result of new LME rules,” it said.
“The LME intends to investigate this further as part of its consideration of whether or not to introduce charge capping,” the exchange added.
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.
From May, the LME will introduce its 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.
Standard load-out rates from LME warehouses will also be raised again from March.
The LME has previously warned that if rental levels rise too high in response to its new rules, it would consider setting fixed maximum rental rates across the board.
“The LME reserves the right to introduce Charge Capping (CC) in the future, should the structural issues caused by high rents, FOT (free on truck) rates and inducements persist,” the LME said in a discussion paper issued in July.
Metal owners are often able to negotiate rent deals significantly below headline charges. From January 1, 2016, warehouses will report incentive “rent deals” to the LME.
“Warehouses are reminded that, if CC were to be implemented in future, the total revenue per unit of metal may be reduced compared to the current ratecard,” the exchange said.
“Warehouses should consider the advisability of paying incentives during 2016-17 on the basis of the full level of 2016-17 rents and FOTs, given the possibility that such rates may fall under a potential future implementation of charge capping.”
The LME, however, has acknowledged that caps could prompt a legal challenge on the basis that capping rents may violate European Union competition law.
The 138-year-old exchange is owned by Hong Kong Exchanges and Clearing Ltd 0388.HK.
Reporting by Pratima Desai; Editing by Mark Potter and Adrian Croft
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