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New faces in LME warehousing but old hands still dominate: Andy Home

LONDON (Reuters) - The number of London Metal Exchange (LME) physical storage units continues to decline in tandem with falling registered stocks.

Aluminium ingots are seen outside a warehouse that stores London Metal Exchange stocks in Port Klang Free Zone, outside Kuala Lumpur, March 23, 2015. REUTERS/Olivia Harris/File Photo

As of July 8 there were 608 registered warehouses for the storage of base metals, down from 621 a year ago and from almost 700 in 2012 and 2013.

Total exchange-registered stocks have fallen to 3.6 million tonnes from over 7.5 million over the same time frame, largely due to the LME’s forced attrition of load-out queues at locations such as Detroit and the Dutch port of Vlissingen.

The LME is plowing on with its warehousing reform package with charge capping the latest measure out for consultation.

In doing so, the exchange is walking a fine line between addressing the concerns of regulators about its physical delivery function and ensuring its warehousing network remains both robust and competitive.

It can therefore take some comfort from the number of new operators seeking LME registration and the relative success a couple of them have had in terms of grabbing a share of inventory.

That said, however, the business of LME storage remains dominated by just a handful of older players.

Graphic on changes in storage units by operator:

tmsnrt.rs/29Q6cZe

Graphic on LME storage units and registered stocks:

tmsnrt.rs/2a2l1Up

OLD HANDS

Just two operators account for 339 of LME registered sheds and, as of the end of June, for almost 70 percent of all registered metal.

Steinweg, the grand-daddy of the LME warehousing business, operates 185 units, having added a net six over the last year, primarily reflecting additional sheds in South Korea.

It held 25 percent of total registered inventory at the end of last month, a share that has risen steadily from just 13 percent in August 2014, when the LME first started publishing stocks-by-operator figures.

Access World, the recently rebranded Pacorini Metals, operates fewer units, 154 as of the LME’s list on July 8, but holds more metal, 44 percent as of the end of June.

That percentage has shrunk over the last year as Access, the logistics arm of trading giant Glencore, makes accelerated load-outs from its sheds in Vlissingen, the location of the last embedded queue in the LME system.

But, interestingly, its storage unit count at the Dutch port has dropped by just three over the last year to a current 36.

Since warehouse operators don’t like operating empty sheds, the inference is that it must be seeing some offset to falling registered stocks from rising unregistered stocks.

If it is, it’s faring better than Metro, the “owner” of the original load-out queue in Detroit.

Metro’s shed count in Motown has dropped from 27 a couple of years ago to 13 after another delisting in the last week. The company was storing just 4.8 percent of LME tonnage at the end of June, down from 24 percent two years ago.

Metro’s broader footprint in the LME storage space has declined by 50 units over the last two years, suggesting it hasn’t been able to replace the once mountainous stockpile of aluminum in Detroit.

Graphic on number of units by operator:

tmsnrt.rs/29Q6Mq3

Graphic on stocks held by operator:

tmsnrt.rs/29RCW0J

DEPARTURES AND ARRIVALS

Gone completely from the list of LME-registered operators are Impala Terminals and Scale Distribution.

Impala delisted its last remaining sheds, mostly in its home port of Antwerp, over the last year after its owner Trafigura took the decision to exit the LME warehousing business.

Scale has also left the LME stage with part owners Macquarie Bank and Orion Mine Finance recently selling their stakes.

Taking their place come new arrivals such as 4STOX and Katoen Natie (Antwerp), Verbrugge International (Vlissingen) and ACE Warehousing (Kaohsiung in Taiwan).

As of the end of June, though, none of them were actually holding any registered metal.

Three relative newcomers have fared better in terms of muscling into the preserve of the old guard, even if two of them are reappearances of old hands.

P Global Services, the original Pacorini before it sold its metal operations to Glencore, added another 28 LME-registered units over the last year, bringing its tally to 39 since it reentered LME storage in 2015. At the end of June it held 4.4 percent of total LME stocks.

ISTIM has fewer sheds, just seven, but more stocks, largely thanks to a foray into the zinc storage business in New Orleans.

The company, a reincarnation of Bill Whelan, the man behind the original Metro, held 5.9 percent of registered stocks at the end of last month, putting it in (a distant) third place behind Access and Steinweg.

Engelhart, part of the commodity business recently spun out of Brazil’s BTG Pactual, has lifted its share of stocks from under one percent in November 2015 to 4.4 percent.

It has listed an additional 11 storage units over the last year, bringing its count to a current 24.

STOCKS FRAGMENTATION

In terms of total units and number of operators, the LME warehousing system has held up remarkably well given the pace of recent change.

More worrying, however, is the continued drainage of physical metal out of the system.

Remember that this is taking place at a time of relatively poor fundamentals in the base metals markets. Most are in supply surplus but you wouldn’t necessarily know that from the downtrend in LME stocks.

LME reforms, particularly those hitting warehousers’ bottom lines such as the recent introduction of rent caps on metal stuck in a queue, may be driving more metal into off-exchange storage deals.

But there is also a growing gravitational pull of stocks towards China.

Stocks of copper sitting in China’s bonded warehouse zone have for several years dwarfed the amount of copper in the LME’s storage system.

More recently, LME nickel stocks have been depleted as metal, Russian full-plate specifically, is shipped to the Shanghai Futures Exchange (ShFE) to support trading liquidity on its new nickel contract. ShFE registered nickel inventory currently stands at 105,880 tonnes.

China remains closed to LME warehousing, a major obstacle for its parent, Hong Kong Exchanges and Clearing, in trying to open up the world’s largest metallic market.

LME Shield, the newly-launched electronic warehouse receipt project, may offer a back-door route into the mainland but while the LME is working out how to expand its warehousing reach eastwards, it is facing a threat from the other direction.

CME Group’s lead contract saw the U.S. exchange open up base metal warehouses outside of its home country for the first time ever.

There are currently 2,605 tonnes of non-warranted metal sitting in CME warehouses in Rotterdam and 1,806 tonnes of similar-status lead in Antwerp.

Listed warehouse operators for the lead contract are a sub-set of the biggest LME operators; Access World, Steinweg, Henry Bath, Engelhart and Worldwide Warehouse Solutions.

A useful reminder that the warehousing business is simply about storing metal, where ever that metal is located and which ever exchange it is registered with.

A basic fact of warehousing life that may come into sharper relief if LME stocks continue to erode.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Editing by David Evans

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