The London Metal Exchange seeks cut in warehouse rent for metals

In order to improve transparency and increase the amount of metal registered under LME warrant, The London Metal Exchange has urged its network of metal warehouse owners to cut the rents charged for storage of metal.

Rents for aluminium on warrant currently stands at about around 54 U.S cents a tonne, of which the exchange earns 1.1%. Storage rent for metal not under LME warrant is 10 cents or less than that.

Commenting on the request, an LME spokesperson said: 

"The LME has initiated a discussion with the warehouse community to find a solution to collectively cut the relatively high headline rents which can keep metal out of the LME network,"

LME warehouses over the last three years have been releasing metal, particularly aluminium to keep the inventories in check. The current stocks at above 1.33 million tonnes are the lowest since Sept. 2008, which touched more than five million tonnes in 2014. The drop was driven by reforms to reduce waiting times for buyers, which included a cap on warehouse rents.

"People have a very clear incentive to keep metal off warrant," a warehousing source said. "About 50 percent of the aluminium under LME warrants is linked to some sort of financing deal," a metals broking source said. "At the moment lower rents would only work for aluminium."

Aluminium has been the most preferred metal for financing deals since 2008, after the U.S. Federal Reserve cut rates to historical lows near zero because of 60 million tonnes surpluses in the market.

Huge global inventories of about 12 million tonnes also make aluminium a favourite choice for financing deals.

LME trading volumes have been falling since January 2015 for reasons including a hefty 31 percent average trading fee hike, which persuaded many to go over-the-counter, and slow demand growth in top consumer China.

Slow demand growth in China and a 31% trading fee hike have caused a drop in trading volumes in the LME for all metals since 2015, compelling a number of traders go over-the-counter.

The damage was worsened in case of aluminium because of lower stocks. The entire aluminium stored in LME warehouses is owned by someone and if a company does not want to take delivery at contract maturity, it can sell and buy back for a future date.