Will Goldman Sachs, Glencore's Warehousing Schemes Prevail?

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We would like to report that following our brief reference to an FT article this week covering comments made by the LME’s new owners, the Hong Kong Clearing & Exchange (HKEx), that the new board is finally getting to grips with the market-distorting delays in accessing warranted metal from LME-approved warehouses.

The problem has been rumbling on for years, but has got steadily worse as the warehouse companies have racked up profits, consumers have paid an unnecessary premium for their metal and the LME has sat on its hands.

RELATED: Is the LME Failing Its Consumers?

Intense lobbying by the warehouse companies, principally owned by Goldman Sachs, Glencore and Trafigura, has so far successfully headed off any meaningful action. Load-out rates were increased slightly following the last consultation in May 2011; the exchange responded by increasing the minimum load-out rates based on a sliding scale depending on how much metal a company is storing on warrant at a given location.

Despite the reforms, the problem has spread to other locations across North America, Europe and Asia, and affects almost all the LME’s main metals contracts, according to John Kemp in Reuters.

Unfortunately the latest consultation, launched on July 1, is already being watered down before it starts, with the HKEx chief executive Charles Li at pains to stress that no decisions had been taken and the board was open to consultation.

The new rules they had proposed would force warehouses with queues of at least 100 days – which the FT quoted traders as saying exists at warehouses owned by Glencore’s Pacorini unit, Goldman’s Metro unit, and Trafigura’s Nems – to deliver metal out at a rate of at least 1,500 tons a day more than is brought in.

That should have the effect, over time, of reducing the length of queues, although the process may take several years at some locations which can have up to a million tons of metal and nearly year-long queues. Needless to say, warehouse owners reacted angrily to the LME’s proposals, according to the FT, saying “the proposal could have very dangerous and unintended consequences for the whole industry,” without spelling out exactly what the threat was to the whole industry.

Continued in Part Two.

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