By Rosalyn Retkwa
Last week’s announcement that the LME would consider further changes to its rules on “load-out” rates at its warehouses were met with relief at the LME’s willingness to admit – fairly quickly – that the changes it adopted last April weren’t enough to solve the problem with huge queues at a handful of key warehouses.
“I am relieved to see that the LME is finally recognizing that the steps they have taken so far to address the warehousing issue have been entirely inadequate,” said Nick Madden, the senior vice president and chief supply officer at Novelis, the world’s largest producer of rolled aluminum products, headquartered in Atlanta, Georgia, in an email.
At the same time, though, people are scratching their heads at the LME’s proposed delay in adopting another set of new rules that might actually fix the problem. “Why wait that long?” is a common question. “The proposed April 1, 2014 implementation date is a long way off, and we are hoping the new rules will prevent further deliveries of copper that actually increase the queues during the waiting period,” said one source who asked to be identified only as an “industry consumer.”
What he was referring to were financing deals, where metals sellers are offered incentives to put their metal into storage at certain key warehouses – notably, in the case of copper, New Orleans; Antwerp, Belgium; and Johor, Malaysia. Once the metal is sold, the responsibility for paying for storage and insurance is transferred to the buyer, so there’s no reason why a seller would turn down a deal, if geography allowed it. So long as that metal sits in storage, waiting to be loaded out, the warehouse operators are collecting rent and insurance. That’s what they get out of it. Under the LME’s current rules, the warehouses are required to “load out” a minimum of 3,000 tonnes a day of any metal from stocks exceeding 900,000 tonnes at a single location. By “loading in” a lot more metal and sticking with the LME’s minimum “load out” rates, the queues have built up to ridiculous levels at a handful of LME warehouses, resulting in waiting times that can stretch to a year or longer for aluminum, which was the first metal impacted by this practice, which is a perfectly legal loophole under the LME’s current rules. And more recently, copper and nickel are getting stuck behind the long queues for aluminum, making for more of a crisis. Therefore, allowing the current rules to stand through next April might result in even bigger stockpiles building up, several sources noted.
“In the last few weeks, we have seen again that the warehouses are able to absorb tens of thousands of tonnes in a short period,” Madden said, in an email. “According to the LME’s timing, it would take almost another year before their proposal would really impact the market. This means another year of supply chain risk and inflated premiums,” he said.
The LME’s proposal – what it calls a “consultation,” or proposed changes that are open for comments through September 30 – would measure all of the metal loaded into a warehouse over a three-month period. If the wait time for delivery is more than 100 days, a warehouse that’s now required to deliver out a minimum of 3,000 tonnes a day would be required to load out at least 1,500 tonnes more per day than it loads in. In addition, if the current load-in rate of a warehouse exceeds the minimum load-out rate, the warehouse would be required to deliver out an amount equal to that excess tonnage.
Robert Bernstein, the attorney who’s representing Southwire and Encore on this issue and also on the fight to prevent physical copper ETFs, said he still wanted to keep the letter of complaint the companies had sent to the LME private “because the LME is proposing a dialogue between now and September 30, and I would like to keep the lines of communication open so that we can have a full and frank exchange of ideas with all the relevant decision makers.”
However, he said that personally, he’s skeptical, as to whether the proposed changes are “too little too late.”
“What assurance is there that metal being released from one warehouse as part of this new rule won’t simply be shipped to another warehouse offering similar incentives in a somewhat different regime?” he said, in an email.
What he’s referring to is that last April, when some metal did come out of storage in response to the first round of reforms, some of it went right back in, too – to other warehouses offering the same or similar incentives. And, if interest rates remain relatively low, “the incentives to keep metal in perpetual storage under financial arrangements will remain stronger than ever,” he said. “I’m anxious to see what analysis has been done, if any, to show that a 1500-ton per day net load-out requirement will actually result in more copper available for immediate delivery to industrial users,” he said.
Meanwhile, Charles Li, the chief executive of Hong Kong Exchanges and Clearing, noted in his blog that “the vast majority of LME Warehouses do not have queues – only five LME good delivery locations have any warehouses with queues,” though he also noted that the problems with those five prime locations are certainly drawing “some attention from metals users and the media.”
Last fall, right before HKEx completed its acquisition of the LME, Li told a reporter from London’s Financial Times that he would take “a bazooka” to the warehouse problem, if he found it was impacting the real economy.
Now he’s taking a softer tone. In a blog entry posted on July 1, he said: “This can’t be solved with either a bazooka or a surgical operation. Instead, a modest approach, such as ‘Chinese medicine,’ might be the cure. That’s what this consultation is all about.”
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