SANTIAGO, April 9 (Reuters) - The London Metal Exchange's warehouse load-out rule change may have increased the amount of copper locked up in financing deals, the exchange's chief executive said on Tuesday.
In an April 1 rule change, the LME stipulated that storage sheds with big queues of one metal waiting to be delivered out must start loading out other so-called "non-dominant" metals separately at a rate of 500 tonnes per day. The move was aimed at cutting queues for metal stuck behind aluminum.
An inadvertent effect of the new rule though has been that copper is leaving warehouses more quickly than ever only to head into rival facilities as part of financing deals that have dominated the LME's warehousing network for the past several years.
Using cheap financing due to low interest rates, traders agree to store their excess metal in long-term rent deals and sell it forward at a higher price due to a healthy forward prices spread. These deals are known as cash-and-carries.
Any traders with metal released from a queue may negotiate a new financing deal and lock the metal up.
"By assuring ... that they can possibly get an extra 500 tonnes out of warehouses, we may have inadvertently made it possible (for financiers) to now start financing copper as well," LME chief Martin Abbott said at the CESCO/CRU conference in Santiago.
"That is one of the risks, one of the consequences we have to live with."
Abbott's comments are likely to stir the debate about the LME's efforts to ease logjams in its warehouses network.
With metal locked down in financing deals, industrial users are angry because the perceived lack of availability of metal has pushed up the costs for them to secure critical raw materials.
They say wait times have not improved enough since the LME raised its loading out rules last year and are skeptical that last week's change will help ease months-long queues at storage facilities.
To be sure big inflows into LME-registered warehouses are partly due to a surplus as industrial demand remains sluggish.
But analysts estimate that about 6 million tonnes of base metals, which is about 80 percent of total LME stocks, are in financing deals or tied up in warehouse backlogs. At just under 600,000 tonnes, LME copper stockpiles are now at 10-year highs.
Abbott was unapologetic on Tuesday.
"I'm still not going to apologise for the fact that we have financing in the industry," Abbott said.
"It is the role of the LME to reflect the macro economy, and the reality is that we have extremely low interest rates, surpluses in certain metals and owners of cheap capital looking for safe havens will continue to finance metal."