An independent study by the London Metal Exchange into its authorised warehouse networks has advised much harsher recommendations than expected.
Key among them is that warehouses with large stockpiles be required to deliver greater sums of metal out of their inventories than is now the case.
It follows complaints from customers who have in some cases experienced delays of up to 10 months waiting for deliveries.
As Reuters reported:
The independent report recommended a daily loadout rate be set “well above” the present minimum of 1,500 tonnes per warehousing company per location, and that these rates be reviewed every six months.
The report from Europe Economics, designed to help ease bottlenecks in the LME’s delivery system, also said rent rebates should be discussed and that higher loadout requirements should apply to warehouses holding more 300,000 tonnes of stock.
This 300,000 tonne level could be lowered however, if queues do not begin to clear, it said.
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“Long queues were regarded as damaging, on the grounds that they inhibited arbitrage between the LME and the physical market, increased physical premiums and damaged the reputation of the LME,” it said.
Metal Bulletin points out that if the recommendations are enforced they should double the load-out requirement for the largest warehouses.
This could help alleviate the current backlog affecting aluminium, which is trading at a premium on a spot basis despite no real supply tightness in the global market.
Analysts, though, have warned that it will take time to implement any recommended changes, meaning it would be wrong to assume the aluminium issues will be resolved soon.
As BarCap wrote on Thursday:
Finally, media attention is heating up on the upcoming results from investigation into the load-out rates at LME warehouses. Speculation is rife as to what, if any, changes to the system the LME may make with aluminium and Detroit the metal and location in particular focus. The backlog in deliveries out of warehouses at certain locations has helped to push physical premiums higher and stretch out lead times. Any subsequent change in LME rules on load-out rates are likely to take time to implement however, and so in our view are unlikely to immediately alleviate the tightness in spot metal.
At first sight, the report doesn’t seem to have commented on the conflict of interest issue highlighted by the UK Parliament’s Science and Technology Committee this week with respect to LME members also owning warehouse companies.
We’ll have more analyst comment on the study as and when we come by it.
Related links:
Please wait 10 months for your aluminium. Thank you – FT Alphaville
Welcome to ‘synthetic warehousing’ – FT Alphaville
China’s bonded-warehouse copper mystery – FT Alphaville
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