LME plans to allow longer warehouse queues will cost consumers

LONDON (Reuters) - London Metal Exchange’s plans to allow extended queues for loading out metal will enable warehouses in its network to boost their profits by holding metal for longer, but consumers will face higher costs as a result, metal industry sources said.

In response to a consultation on the changes, warehouse firms have come out in favor but consumers remain opposed.

Current rules were introduced to eliminate long waiting times after queues to take aluminum out of LME-registered warehouses in Vlissingen soared to two years and to 700 calendar days in Detroit in 2014, sparking consumer complaints.

They include queue-based rent capping (QBRC) stipulating full rent payable for 30 days, half rent for 20 days and no rent after 50 days. The LME is proposing to change that to full rent payable for 80 days and no rent thereafter.

This means warehouses could pay metal owners larger incentives to put metal on LME warrant instead of offering it to the physical market where premiums reflecting supply, demand and costs such as transport and insurance have to be paid.

Consumers typically buy metal on contracts priced to include the physical market premium plus the LME benchmark price. They also buy on the physical market if they run short of metal.

“This will help the warehouses improve revenues, but for us it means more expensive metal,” a source at an aluminum consuming firm said.

If the rules are implemented, the first stage would be a move to 50 days of full rent in February next year, followed by 60 days in May, 70 days in August and 80 days in November 2020.

Before warehouse regulations can be changed, the LME has to consult the market, a process which started in July and ends officially on Thursday.

“By the time (the consultation) is issued, changes are pretty much a done deal unless something really drastic changes,” a source at an aluminum consumer said.

“Incentives create artificial shortages, which translate into higher prices for consumers.”

The LME declined to comment.

Incentives are paid per tonne of metal going on LME warrant and are calculated using free-on-truck (FOT) rates, a payment made to warehouses to prepare metal for transport, and the rent that could be earned.

For aluminum, the average FOT is around $50 a tonne. Rent at around 54 U.S. cents a tonne for 80 days would mean an incentive payment of $93 a tonne is possible.

Premiums for aluminum early in 2015 rose above $500 a tonne in the United States before the LME’s new warehousing rules kicked in and fell to $130 a tonne in Sept. 2016.

“People have told the LME they shouldn’t do this, but whether they listen is another matter,” an aluminum trading source said.

The exchange said in a recent presentation it did not expect the 80-day QBRC model to allow warehouses to pay incentives above the physical market premium and that implementation would be halted if the new rules cause disruption at any stage.

Reporting by Pratima Desai; editing by David Evans