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By Andy Home
LONDON, April 4 Just when we all thought the London Metal Exchange (LME) had closed the chapter on its logistics woes, out tumbles another skeleton from the exchange's warehousing closet.
This time it is the turn of Access World, the metal logistics arm of Glencore that was previously known as Pacorini Metals, to feel the regulatory heat.
Its U.S. subsidiary has just been hit with a $1.4-million fine plus costs for, the LME alleges, falsifying documents related to its storage of zinc in the U.S. port of New Orleans.
Access World has settled with the LME without "admitting any of the alleged breaches or matters" that led to the exchange investigating the company, the LME said.
Access and its owner Glencore, it should be noted, are still fighting off a lawsuit by zinc users which includes similar allegations of malpractice in its New Orleans LME logistics operations.
This is the latest warehousing scalp claimed by the exchange.
The list now includes Metro International, which was punished with a $10 million fine for abetting "merry-go-round" storage deals for aluminium, CWT, which was fined 100,000 pounds ($149,000) for failing to notify the LME of potential conflicts of interest between its warehousing and trading arms, and Worldwide Warehouse Solutions (WWS), which was fined 30,000 pounds for misreporting lead stocks.
The charge levelled against Access is specific, namely an alleged breach of Clause 7.5.5(i) of the LME's warehousing agreement, requiring "proper and accurate recording of transactions in books and records".
Left to one side is the bigger question of whether misreporting stocks levels in the LME system has market impact.
Do exchange inventories, published each day by the LME, actually matter much in price determination?
Because if they do, the LME should republish the corrected zinc stocks figures for that period.
The LME alleges that on occasions between September 2010 and October 2014 Access World (USA) LLC "employees falsified documents, including bills of lading, to give the exchange the impression that zinc had physically moved from the New Orleans delivery point when it had either not moved or it had moved but on a date other than shown in the inventory records".
Access World said it had encountered logistical issues in New Orleans during that period, according to the LME statement.
Rather than contact the exchange to discuss the issues, senior management allowed customers to leave metal in warehouses while employees allegedly created the falsified records showing the metal had moved, the LME added.
These allegations date back to a period when there were huge amounts of zinc sitting in LME warehouse sheds in New Orleans. In December 2012, for example, the U.S. port held over 800,000 tonnes of zinc, representing around two-thirds of the total amount in the LME's global system.
Access World was the dominant logistics operator in the city at the time.
The LME only started publishing stocks by operator information in April 2014 but in that month Access held 668,150 tonnes of LME-registered metal (not just zinc) in New Orleans. The only other operator with registered stocks in the city that month was Metro, which held 86,625 tonnes.
The New Orleans zinc stocks were highly mobile over the 2010-2014 period with flurries of huge cancellations, such as the 250,000 tonnes that were moved off-warrant in the space of three days in September 2012.
There were both significant daily outflows and sporadic large-tonnage inflows of zinc.
It was fairly obvious to the outside world that this was metal circulating between on- and off-warrant storage in the city as stocks financiers searched for the cheapest rental for their metal.
In essence, New Orleans was a zinc mirror of the much larger circulation of aluminium at Detroit orchestrated by Metro and dubbed the "merry-go-round" by U.S. Senator Carl Levin in a committee hearing into Wall Street's involvement in the commodities business. Metro was owned by Goldman Sachs at the time.
It seems that Access World was at times struggling to catch up with its own "Big Easy" zinc merry-go-round.
Graphic on LME zinc stocks and price: 2010-2017:
RESHAPING THE NARRATIVE?
Will the LME now republish the correct historical figures for New Orleans zinc outflows over the four-year period?
Does it matter?
After all, the U.S. Securities and Exchange Commission (SEC) found in December 2012 that "LME inventories specifically do not appear to have any independent statistical effect on copper prices".
That finding came amid the SEC's consideration of a physical copper fund promoted by JPMorgan. It approved creation of the fund, although it was subsequently never launched.
It's still a questionable conclusion.
The SEC confined itself to considerations of outright price rather than spreads, which, particularly on the LME, can be far more sensitive to shifts in stocks availability.
Moreover, sudden, unexpected stocks developments can generate fleeting price movements. This appeared to be the case with WWS's erroneous lead stocks reporting in March 2016.
True, the prolonged nature of the allegedly false reporting of zinc stocks by Access mitigates against such a direct, specific price reaction.
But LME stock movements do affect a market's narrative over time.
Falling zinc stocks over the period 2012-2014 fed into a story of mine closures and pending shortfall. The LME three-month price rallied above the $2,400 level in September 2014 to hit what were then three-year highs.
It did so again in May 2015 when LME stocks had fallen further, although zinc's bull narrative was unwound later that year when 230,000 tonnes of zinc flooded into the LME system over the space of August and September. At New Orleans. Where else?
Did Access' misreporting of daily load-outs play a part in that price roller-coaster?
It's impossible to say, not least because we have no idea of the size of the misreporting. If it were a few hundred tonnes here and there, the impact would have been marginal. A few thousand tonnes and things might look a little different.
Right now, the official stocks record stands. And that's problematic because, whatever the SEC might think, there are still plenty of market participants who factor in stock-price relationships to their assessments of market fundamentals.
Maybe they're wrong to do so. But even if they are wrong, the least the LME could do is provide them with accurate historical data.
(Editing by David Evans)