LME Decision's Made, But They Just Aren't Telling Us Yet

Well, the LME seems one step closer to deciding how to tackle the extreme delivery queues for material from their warehouse system. As Reuters reports, the LME reached a decision last Friday. They’re just not telling anyone yet.

In a sense, who can blame them. They have upset just about everyone in the industry so far, and garnered considerable criticism for not consulting industry stakeholders sufficiently. So while they may have come to some decisions, they probably want to have their arguments behind closed doors, as been the nature of their approach over the years.

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However, we can readily guess what those changes are likely to be. In July, the LME proposed new rules, starting next April, to overhaul the delivery system. These rules would force warehouses to release more stocks once the wait-time breaches 100 days. Reuters points out that many are expressing surprise if the LME moves away from those early proposals, so expect warehouses to be forced to release more material than they can take in if their wait times are extended.

In reality, this may affect only a part of the LME system, as two-thirds of the roughly 5.4 million tons of aluminum sitting on the LME are stored in only two locations – Detroit, U.S.A., and the port of Vlissingen, the Netherlands.

In an article from this week, the FT suggests that the 100-day cap may have some room for adjustment. It points out consumers have been demanding a 30-day limit, and early drafts of the LME proposals from back in late spring did mention a possible 30-day cap. Producers, however, are worried that drastic changes could unleash the stocks on to the market, hitting prices.

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According to Reuters, both Rusal and Alcoa have publicly lobbied for the LME to leave its warehousing rules unchanged, demanding instead for greater transparency as to who is holding positions. It is possible that 30 days may be seen as too drastic, and somewhere between 30 and 100 will be the final load out cap. That in itself would involve those two most popular locations taking little or no more metal for a considerable period of time. The days of taking in 30,000 tons a day and loading out just a few thousand are over.

Those queues, and the incentives warehouse operators have paid to attract metal into their locations, have contributed to the large physical premiums that are distorting the market and upsetting consumers everywhere. The WSJ recently wrote the only parties to have gained from the premiums are the producers, estimating Rusal and Alcoa alone have benefitted to the tune of $1.4bn in recent years. No wonder they don’t want a change in the rules.

Faster load out rates may ease premiums, but load out rates alone are not causing high premiums. And unless there was a drastic reduction, like to 30 days, it’s unlikely physical premiums would return to the sub $100/ton level of before the financial crisis. It would seem we are going to have to wait a little longer for the LME to tell all. Approval by the FCA is likely to be one issue they are addressing, but that should take no more than a few days.

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