Last month, the European Union’s Enterprise and Industry Directorate General started a review of the London Metal Exchange’s warehousing arrangements with another EU body, the Internal Market and Services Directorate General, following complaints from the aluminum industry that load-out rates from LME-approved warehouses were resulting in buyers having to pay more for their metal than they should.
According to Bloomberg, at current minimum delivery load-out rates set by the LME, metal buyers may wait as long as 55 weeks to obtain metal in the Dutch port of Vlissingen, which accounts for 55 percent of European LME aluminum stockpiles and 26 percent of global inventories.
During this time, the buyer has to pay warehouse rent and insurance. On top of this, the scarcity caused by the long delay helps push up physical premiums paid by buyers wanting prompt delivery of metal.
The premium added to the price of aluminum for immediate delivery on the LME is at a record $280 to $295 a metric ton at warehouses in Rotterdam, according to a Bloomberg article quoting Platts data.
Nor is the problem restricted to Europe: load-out delays and high physical premiums are a feature of the US market and in Asia. Robin Bhar, an industry expert at Societe Generale in London, is quoted as saying the EU discussions “might be a prelude to a full-scale investigation, they are looking at it, asking the question: ‘do they, or do they not need to investigate further?’”
An undisclosed member of the aluminum industry has now added further impetus following a complaint made this month to the EU’s powerful competitions watchdog. The identity is not clear, but is believed to be at least one large maker of aluminum goods and there could be several parties involved. The EU is said to be reviewing the case but is likely to go ahead.
Part of the problem is metals traders such as Glencore, and banks such as Goldman Sachs Group Inc. and JPMorgan & Chase Co. not only own some of the warehouse companies, but are in some cases also dealing members of the exchange, giving them a vested interest in the status quo.
A Reuters article quotes a source involved with the review as saying, “it is a conflict of interest but there is no law that prohibits banks and trade houses owning warehouses or financing the storage of commodities. The problem is when this conflict of interest translates into anti-competitive practice,” and that is what the commission will be seeking to establish: whether these restricted load-out rates are a symptom of anti-competitive practices.
The fact is, load-in rates are consistently much higher, and left to their own devices, the LME has not remedied the situation — so it appears there are good grounds for an investigation.
We hope that it will not take too long and that a decision will be reached before anyone on the back end of that 55-week waiting list at Vlissingen finally gets their metal near Christmas…next year.