March 29, 2019 / 11:07 AM / 24 days ago

LME sets out potential changes to warehousing rules to boost stocks

LONDON (Reuters) - Proposals to modify London Metal Exchange rules to attract more metal into its system would help boost stocks and revenues for warehousing firms and improve transparency, LME chief executive Matt Chamberlain said.

FILE PHOTO: 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

Sweeping reforms since 2013 aimed at shrinking queues in LME approved warehouses are one reason behind stocks of metal such as aluminum sliding to near one million tonnes, the lowest in more than a decade, from a record high above 5.49 million tonnes in January 2014.

Historically, some of the surplus in the aluminum market in recent years would have been deposited under LME warrant.

“The argument is that there is more metal out there, people would make more use of LME warranting if circumstances were different. That would be good for warehouses and good for the market,” said Chamberlain said.

“We want to be sure (warehouses’) business models remain financially viable. Rolling back all the rules wouldn’t be acceptable to the broader market, but we would support changes that make it easier for warehouses to do business.”

The proposals made by warehousing firms and published by the LME in a discussion paper on Friday include extending to 80 days the length of time that full storage fees are payable on metal waiting to be loaded out. That compares with the current 30 days of full rent and 20 days half rent.

“Some warehouse operators believe this may enable them to attract and incentivize larger quantities of stock into LME storage, while still providing protection for metal owners against structural queues,” the LME said.

“The possible consequences of such an amendment...would be the ability of warehouses to exhibit queues of 80 days before being affected by financial penalties.”

The exchange added: “LME warranting is used more broadly by metals market participants seeking to store and finance metal, many of who believe that liquidity and transparency would be enhanced by higher stock levels.”

One proposal is cutting warehouse rents for metal on LME warrant, which for aluminum is mostly around 55 U.S. cents a tonne, many times more than storage costs for off-warrant metal, typically below 10 U.S. cents.

But metal industry sources say any reductions would be resisted by warehouse firms that offer only storage facilities.

Short queues are not a problem for firms that provide storage and logistical services such as handling and chartering, as their revenue streams are diversified.

Limitations on “evergreen” rent deals - agreements between warehouses and metal owners to share rental income - are also suggested. These deals allow owners to keep receiving rent on metal they have sold.

“Some warehouse operators believe that this may reduce the practice of metal being withdrawn from warehouses purely to end these evergreen payments,” the exchange said.

“There is a substantial section of the market which believes that it is not the LME’s role to intervene in commercial arrangements between warehouse companies and metal owners.”

The deadline for responses to the discussion paper is the end of May. Results will be published in the third quarter and if appropriate the process will move to the consultation stage.

Reporting by Pratima Desai; Editing by Edmund Blair and Elaine Hardcastle

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