(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON, Sept 30 The London Metal Exchange (LME)
has this week confirmed it will cap both rents and load-out
charges across its physical delivery network effective next
The move was widely expected.
The exchange has learnt the hard way to tick all the boxes
when it consults users on changes to its warehousing system.
A judicial review of its modus operandi was successfully
negotiated in 2014 but at the cost of a one-year delay in
introducing an earlier measure to link load-in and load-out
Since then the exchange has published enough discussion and
consultation papers to constitute a veritable library on how
physical delivery should work for a commodities exchange.
The acronyms have accumulated. FQLC, PILOR, QBWR, FOTC and
CBIG have all fallen by the wayside with the core pillars of the
reform package condensed to LILO (original and enhanced), LORI
(load out rate increase), QBRC (queue based rent capping) and
now CC (charge capping).
Those involved in the nitty-gritty business of storing metal
have had to consider the relative merits of a "deterministic
process by reference to exogenous datapoints" or a
"deterministic process by reference to endogenous datapoints."
The former was preferred, since you ask.
And now, after three years, it's done. Charge capping is the
final part of a multi-piece regulatory jigsaw to fall into
So is it mission accomplished for the LME?
IN THE BEGINNING THERE WAS THE QUEUE
This painstaking overhaul was kick-started by the furore
over the load-out queue for aluminium in Detroit.
The bottlenecking of the gateway between paper and physical
markets resulted in a fracturing of the aluminium price between
the basis LME price and the all-in price, manifest in a
ballooning physical premium which most end-users had no way of
The collective outrage, particularly in the United States
generated a fire storm of media and regulatory interest in how
the LME warehousing system was working, or rather not working.
That Detroit queue has gone and the warehousing company that
so cleverly devised its perpetuation, Metro, has been slapped
with a $10 million retroactive fine.
Copycat queues at Antwerp, New Orleans and Johor, have also
As of the end of last month there was still a 349-day
waiting time to move aluminium out of Vlissingen sheds operated
by Access World, the rebranded logistics arm of Glencore.
But there are only 54,625 tonnes of uncancelled aluminium
left in the Dutch port and there has been no fresh inflow since
LORI and LILO have broken the former queue model, while QBRC
means reduced costs for those stuck in the queue, or even no
costs if they've been there for over 50 days.
The last load-out queue looks set to decay naturally over
BEYOND THE QUEUES
At some stage in this whole process, however, the regulatory
imperative of sorting out the LME's malfunctioning delivery
system shifted gears.
Charge capping, for example, was never on the original
agenda, even though the high cost of LME storage relative to
off-exchange storage was arguably the reason why all that metal
was queuing to leave the system in the first place.
But then that's what happens when you make it to the top of
the U.S. news schedule and powerful aluminium consumers such as
MillerCoors are berating U.S. senators for not doing anything.
Regulatory pressure has pushed the LME way beyond simply
dealing with load-out queues.
Every exchange document on the subject of warehousing now
spells out the "LME's regulatory obligations, including to
demonstrate and to provide assurance to the (British financial
regulator) FCA that the LME has arrangements in place to ensure
that its warehousing arrangements operate in a way that enables
LME to continue to satisfy its regulatory obligations."
There has been a logistics review, including a redefinition
of what actually constitutes a load-out, a rewriting of the
legal contract between exchange and warehouse operators, a
requirement that operators disclose all their incentives for
attracting metal into their sheds, and a beefing up of the LME's
What was once seen as an ancillary logistics function,
largely uncontrolled by the LME itself, is now part and parcel
of the regulatory framework covering metals trading.
Previous administrations had shied away from capping
warehouse charges for fear of a legal backlash, but this one has
benefited from the explicit backing of the FCA and, perhaps even
more significantly, the implicit prodding by U.S. regulators.
MARKET OF LAST RESORT?
Not all of the reform package has worked.
A new range of physical aluminium premium contracts has been
rolled out to assuage the hedging problems created by the
Those that called for the new contracts, however, have
spurned them in favour of similar products traded on the CME.
A new commitment of traders report, launched in response to
calls for greater transparency, casts as much darkness as light
on the realities of base metals trading.
But these are minor casualties in the broader campaign to
rein in the excesses of LME logistics providers.
The freeze on warehousing charges, in particular, will be
broadly welcomed by market users who have had to watch
helplessly a counterintuitive upwards spiral of headline rents
and load-out charges that has been running for many years.
Everyone has always known that the widening cost gap between
on- and off-exchange storage lay at the heart of the LME's
warehousing woes and now that gap should start closing over the
envisaged five-year freeze.
Does this mean that the LME can once again function as a
credible "market of last resort" for end-users?
The truth is that it never did. Nor will it ever become
anything other than an "in extremis" part of the industrial
The very nature of the London market, whereby the seller
gets to choose which warrants to deliver to the buyer and, even
more critically, at which location, will always mean the system
is biased in favour of the producer over the consumer.
The load-out queues tilted that natural slant to extreme
levels and the LME's reform package has amounted to a regulatory
re-levelling of the playing field.
Is it possible that it has shifted the "market of last
resort" balance too far the other way?
That we'll only find out if there's another global crisis
and a flood of unwanted producer metal into the system such as
happened after the last one in 2008-2009.
The "market of last resort" concept works both ways. The
LME's revamped delivery system looks a lot better on the "out"
side of the equation, but it will only really be tested when the
"in" part is required to function just as efficiently.
(Editing by David Evans)