16 FEBRUARY 2014Reuters
Warehouse firms walk away from reforming London Metal Exchange
Edited by : AL CIRCLE
2 min read
A bid by the London Metal Exchange (LME) to ensure clients can obtain aluminium faster from owners of warehouses in its global network risks eroding its function as the world's top metals marketplace.
Some warehouse companies are starting to walk away.
Industry leaders and analysts say shed owners, who profit from keeping aluminium stockpiles in long-term financing deals or to earn rent, are preparing to move metal to depots that are beyond LME supervision. This could mean the LME, bought by Hong Kong Exchanges and Clearing (0388.HK) in 2012, will lose its unique grasp on the location and quantity of stored aluminium, which lends transparency to the market. Less metal will also be available to industrial companies that have bought LME warrants - quality-assured ownership certificates - through the futures exchange.
The LME, reacting to bitter complaints from metals users about delays in getting hold of metal with their warrants, last year announced changes to its rules on warehouses, stipulating a 50-day maximum wait time.
In a notice to members this month, the LME said an expected consequence of increased load-out of metal from LME warehouses was a quicker net flow of metal to off-LME storage, with potential difficulties for the market in respect of stock visibility, premium price discovery and hedging.
"Off-LME storage is, by definition, not a topic on which the LME can comment," it said in the notice. The rules come into effect on April 1 but already metal is being shifted, not so much into the hands of manufacturers needing raw material, but into warehouses where the LME has no say.
"If you look at total inventories today they are going down, but there is movement between the reported inventories and non-reported inventories," said Svein Richard Brandtzaeg, the chief executive of Norsk Hydro (NHY.OL), one of the world's largest producers of aluminium.
"We believe this metal doesn't necessarily move into the industrial physical market."
Some warehouse companies are starting to walk away.
Industry leaders and analysts say shed owners, who profit from keeping aluminium stockpiles in long-term financing deals or to earn rent, are preparing to move metal to depots that are beyond LME supervision. This could mean the LME, bought by Hong Kong Exchanges and Clearing (0388.HK) in 2012, will lose its unique grasp on the location and quantity of stored aluminium, which lends transparency to the market. Less metal will also be available to industrial companies that have bought LME warrants - quality-assured ownership certificates - through the futures exchange.
The LME, reacting to bitter complaints from metals users about delays in getting hold of metal with their warrants, last year announced changes to its rules on warehouses, stipulating a 50-day maximum wait time.
In a notice to members this month, the LME said an expected consequence of increased load-out of metal from LME warehouses was a quicker net flow of metal to off-LME storage, with potential difficulties for the market in respect of stock visibility, premium price discovery and hedging.
"Off-LME storage is, by definition, not a topic on which the LME can comment," it said in the notice. The rules come into effect on April 1 but already metal is being shifted, not so much into the hands of manufacturers needing raw material, but into warehouses where the LME has no say.
"If you look at total inventories today they are going down, but there is movement between the reported inventories and non-reported inventories," said Svein Richard Brandtzaeg, the chief executive of Norsk Hydro (NHY.OL), one of the world's largest producers of aluminium.
"We believe this metal doesn't necessarily move into the industrial physical market."
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