In a surprise move the London Metal Exchange (LME) announced an increase in both warehouse rents and the cost of taking material off the exchange. Maximum rents are to rise by 4.9% while the delivery charge is to go up by an average 2.7%. According to a report in Thomson Reuters since 2004 LME rents across the six main contracts have risen by 59.9%, but vary significantly by metal with tin up by 78.7% but copper up by only 48.5%. The following graph shows the rise in rents since 2004, courtesy of Reuters.
Nevertheless the 2.7% rise outstrips inflation at 1.4% last year and estimated at 2.0% this year.
The size and timing of the rises, to take effect from April 1, will have the biggest impact on aluminum which has seen a massive stock and sale play over the last year. Because the contango on aluminum has been high, typically $32/ton over 3 months and $100/ton over 12 months traders and banks have sold excess production forward on the exchange at a premium over spot. From that premium they have paid storage, insurance and financed the deal at historically low interest rates, after which the balance is profit. So attractive has the deal been that some 3.5 million tons of the 4.56 million tons of aluminum on the LME is tied up in such deals. The new rates will push the average cost of storage up to $32/ton over 3 months and $140/ton over 12 months making the future for such deals highly questionable.
Many of the current deals come up for expiry in the second quarter and early in the third of this year. The expectation is warrants will be canceled and metal will be taken out for financing in cheaper non LME warehouses, a trend that was already gathering pace particularly in the US where aluminum was said to be increasingly stored in auto makers empty warehouses. Apparently the cost can be 1/10th of the cost of rents in LME warehouses and accounts for the acceleration in metal leaving and in canceled warrants metal earmarked for leaving. Traders looking to remove metal could face a problem however because warehouse companies are moving metal out at a maximum rate of just 500-600 tons a day compared to a rate of 2,000-4,000 tons that they are prepared to bring metal in. Needless to say they do not want to see their livelihood disappear out the door and are making it as difficult as possible for traders to move metal under long-term finance deals off warrant. Uneconomical storage deals and the prospect of higher handling costs could cause traders to dump metal before the deadline. The flood of metal leaving the exchanges could be misinterpreted as physical demand when it is not. It could be a volatile time for aluminum. We suggest aluminum buyers track LME inventory movements by warehouse as well as physical premiums being paid for prompt delivery. Detroit has been very active this year.