More Regulation Needed To Solve LME Warehouse Queues

The London Metal Exchange's latest proposal to address the issue of long queues for delivering metal out of its warehouses should go some way to easing the effect of aluminum and zinc bottlenecks on other metals, but more could be done to further improve the situation, Barclays said Monday.

Last week, the LME proposed that warehouse companies that have scheduled delivery commitments of 30,000 metric tons or more of one metal from a particular location deliver out an additional 500 tons of metal per day from that location of metals other than the dominant metal.

This is in reaction to delivery backlogs at certain warehouses caused by some metals, especially aluminum, which have become increasingly popular as a financing tool since the global financial crisis. This is restricting the delivery of other metals, such as tin and nickel, which can get caught behind aluminum in long queues of metal due to exit the warehouse.

Last year, the LME decided to lift to 3,000 tons a day the minimum daily delivery rate for any warehouse holding more than 900,000 tons of metal, in a bid to deal with persistently long queues in the aluminum market.

"If the new proposal by the LME is applied to all live cancelled warrants as of April 1 2013... it would go some way towards separating the non-dominant queue from the dominant metal queue and provide a combined minimum load-out rate for non-dominant metals," Barclays said.

However, one of the "structural issues" behind long LME warehouse queues is that the daily load-out rates required by the exchange apply only on a 'per company per location' basis, the bank said. This means that warehouses that house a large amount of metal owned by a single company are impacted less by the LME's minimum delivery requirements.

"For instance, if there were five warehouse companies in one location that each held 600 tons [of metal], 12,500 tons of metal would be delivered out each day. But if there were only one warehouse company in that location holding all the 3 million tons of metal, only 3,000 tons per day would be delivered out," Barclays said.

While the LME's new proposal goes some way towards addressing the spill-over effects of long queues created by aluminium and zinc, "changes to the LME warehousing policy--such as applying a minimum load-out rate per warehouse shed, per company per location or setting a maximum for the volume of metal that can be stored per warehouse company per location--would go much further towards addressing the issue for all the base metals," the bank added.