LME warehouse war goes global

Now we know how the clash of the titans played out in the aluminium market last December.

It's one of the quirks of the London Metal Exchange's (LME) arcane trading system that the monthly "third Wednesday" prime prompt actually takes place on the Monday of the week, December 19th in this case. And over the following two days, December 20 and 21, 500,000 tonnes of metal were cancelled at Vlissingen in the Netherlands. The tonnage corresponds with the size of the short position that sat on the December prime date.

Since there was still only one LME warehouse operator in Vlissingen at the time, Pacorini, you don't need to possess extraordinary powers of deduction to work out that it was Glencore, Pacorini's owner, that was the short and chose to deliver. And, as just about everyone now seems to know, it was JP Morgan that was the long.

JP Morgan is now in the process of removing the metal, supposedly to deliver to its own Henry Bath warehouses in Rotterdam. At the stipulated minimum (read maximum) load-out rate of 1,500 tonnes per day. Thirty-five thousand tonnes have departed since January 3, leaving 465,500 tonnes to go.

Bar an unlikely burst of load-out enthusiasm by Pacorini, 60,000 tonnes will depart between today and April 1, when the LME's new sliding load-out rates kick in. By that time, assuming no more metal is delivered in, registered tonnage at Pacorini's sheds in Vlissingen will have fallen to below 900,000 tonnes, meaning it will be required to lift the daily load-out rate to 2,500 tonnes per day.

That means another 162 working days to move the mountain and another 162 days of paying rent to Pacorini. At the new higher rate of 45 cents per tonne per day, which also takes effect from April 1. It's a 10 per cent increase from the 41 cents charged for the current financial year. A case of "you win some, you win some" for Glencore.

Two new LME-approved warehouses have just opened up for business in the Dutch port that was once known for its herring industry.

Worldwide Warehouse Solutions, previously Delivery Network until bought by Noble Group, and Kloosterboer have gained a small foothold in a city still dominated by Pacorini's 27 registered sheds. Kloosterboer's website describes the new arrival as an "independent family business."

"With over three million cu m cold storage capacity, Kloosterboer is one of the leading logistic providers for temperature-controlled goods in Western Europe."

Well, it's in the right business. Because this aluminium warehouse war is all about placing metal in the deep freezer, earning the owner money, the spread between the interbank lending rate and the aluminium curve contango, earning the warehouse owner rent and earning physical market players higher premiums.

For those lucky enough both to own their own warehouses and trade in the physical premium market, it's a case of "you win some, you win some and you win some more". Which is why so many want a bit of the stocks financing action.

The war started in Detroit, where Metro, Goldman Sachs' warehouse operator, dominates the LME warehousing business. It allowed its warrants to free-float. With most of the rest of the LME stock locked up in the deep freezer, anyone taking delivery of metal from the system got it in Detroit. The result was those now infamous Motown queues, all that cancelled metal still paying enough rent to allow Metro to pay incentives for more metal.

That particular battle is still raging. Someone cancelled 50,000 tonnes of aluminium in Detroit last Thursday. There are now 452,475 tonnes sitting in the queue. The opening of the European front in the warehouse war was always on the cards as soon as Pacorini started building out its Vlissingen storage space.

Now it's starting to look like an Asian front has opened up as well. Over the course of January 20 and 21, just after the passage of the January prime prompt, over 100,000 tonnes of aluminium were cancelled in the Malaysian port of Johor. It's not the first time this has happened but it's the largest tonnage yet. And now Johor has almost 113,000 tonnes waiting in the departure lounge.

Who's stuffing it to whom in Malaysia? It's a bit more difficult to say since all the big warehouse operators have LME-listed sheds in Johor. But, interestingly, when ETF Securities bought 500 tonnes of LME metal on January 12 for its physical aluminium ETF, it got Pacorini warrants in Johor, suggesting that these were the free-float obtainable through the clearing at the time.

This war has gone global. The December-date crunch saw the biggest flows of metal onto warrant and off warrant in the LME's history.

Between them Detroit, Vlissingen and Johor have accounted for just about all the aluminium activities in the LME's global warehouse system since the start of December.

Martin Abbott, chief executive of the LME, may be ruing his words at the time of the Exchange's decision to change its load-out requirements back in May 2011.

"It should be noted that this issue currently is specific to aluminium and to one location; the LME does not have a systemic issue with its warehouse network."

Really? Because in aluminium at least, the conflagration has spread. And the exchange is now powerless to stop it, hamstrung by its need for warehouse operators and the legal constraints on dictating either how they operate or who owns them.

Even its changes to the load-out rate have been thrown back in its face in the form of predictably aggressive increases in warehouse rents. The best that can be said of the current situation is that at least the battles are taking place in the open, where we can all see what is happening. How long that remains the case we'll see. Or rather, maybe we won't see.

Will that 500,000 tonnes moving from Vlissingen come back onto warrant somewhere else or simply disappear into an off-market deep freezer? And when will the war end?

As Abbott told a conference in Paris last September: "The only person that can stop the mass financing of aluminium is probably Ben Bernanke, but he doesn't show any willingness right now to turn off the taps." "It's just a factor in the market that you'll have to learn to live with."