LME eyes ways to ease warehouse bottlenecks

The London Metal Exchange (LME) is looking at new ways to solve problems in its controversial metals warehousing system as frustration builds among the exchange’s industrial users over supply bottlenecks, metals industry sources said.

One option put forward for consideration is scrapping the minimum tonnage delivery out rate in favour of a percentage of warehouse inventories, industry sources say.

Firms running warehouses registered by the LME, the world's biggest industrial metals marketplace, have been making money by building up big stocks and charging for storage while they deliver metal at a limited rate to holders of LME contracts.

This has created tensions with consumers of the metals who say these storage plays have boosted prices for metal critical for their businesses.

LME rules stipulate a minimum delivery rate for metals stored in the warehouses it monitors. Warehouses do not have to ship out any more than that amount, which is 3,000 tons per day for a warehouse company holding more than 900,000 tons of metal in one location.

This means that in Detroit, for instance, where aluminium stocks are around 1.5 million tons, anyone wishing to withdraw supplies from that location currently faces a wait of around a year.

"One idea that has been floated is a different way of calculating what should be delivered out, a percentage. That is one idea that has specifically been put forward," one metals industry source with knowledge of the matter said.

A second industry source confirmed that suggestion, and said any discussions with warehouse firms could open with 1 percent of stock per location, and possibly eventually be knocked down to 0.5-0.75 percent.

At 1 percent, warehouses in Detroit would have to deliver out around 15,000 tons of aluminium a day, which could shorten the queue to a few months.

This could ease tensions with consumers of the metals. The latest complaints this week came from The Beer Institute, which represents global brewers and their suppliers struggling to get aluminium for cans at a reasonable price.

For warehouses, backlogs are lucrative because metal waiting to be delivered out continues to earn storage fees. They also say the backlogs are due to the logistical difficulties of moving large amounts of metal.