The London Metal Exchange recently approved the return to the metal warehousing scene of one of the industry’s veterans. Bill Whelan co-founded Metro International Metals back in 1991 with Ed Schulak and in under twenty years built Metro into one of the largest warehousing companies in the LME’s network according to a Reuters article.
By the time Goldman Sachs Group bought Metro for $550 million in February 2010, stocks in Detroit had grown more than threefold to over 900,000 tons or about 20% of global aluminum LME stocks. Metro still dominates in Detroit, operating 30 out of the 38 facilities approved by the exchange there. Almost 30% of the LME’s 5.4 million tons of aluminum is stored there.
Whelan’s return to the metal storage market will be under a different environment than when he left. Public and regulatory scrutiny is much tighter and though the LME’s rule changes are having to overcome considerable legal obstacles, the intent is clear that the rampant exploitation of the system by a few keys players since the financial crisis will not be allowed to continue.
Whelan, himself, admits metal storage will not be as profitable as it was for the likes of Goldman and Glencore in recent years but believes there is a still a good business to be had for anyone with the skills to operate an efficient model. So, here, we have to give due acknowledgement to an operator who is among the best in the business.
Whelan hasn’t sat idly on his hands since 2010, WF Whelan & Co. has grown into one of the slickest logistics providers in the automotive market handling 20,000 wheels a day imported from around the world and shipped to 36 Ford, Chrysler and GM plants in North and Central America. The firm’s warehouses hold 650,000-800,000 wheels moving 5 million a year in and out on a JIT basis – service a base metal consumer considering using the LME could only dream off.
The firm applied for LME approval last year but had to build a 1,200-ft. rail spur as part of the process to meet LME rules that required delivery and collection by rail in addition to truck or, in some locations, barge. The new operation will allow the firm to start the way it wants to, with load-out rates set high enough that queues do not form. It is perfectly possible to do so. C Steinweg have operated throughout recent years without load out queues as does Henry Bath.
What This Means for Metal Buyers
For consumers, the entrance of a new warehouse provider is a good development. The more new entrants, the more competition and the less pressure remaining queues can exert on the market price. The LME is actively encouraging new entrants as one of a number of steps the exchange is taking to bring physical delivery premiums into line with historical norms where it simply reflects local loading and delivery costs.
The international scale of the LME’s operations, while a strength in terms of swapping metal for delivery anywhere in the world and allowing price arbitrage, has also proved to be a major constraint when trying to tackle the queue problem. Legal barriers in the form of competition law are significantly different in Europe than the US, limiting the scope for uniform rule changes.
Still, the arrival of new entrants will change the dynamics, hopefully for the better, but as we have said before the loss of more regulated western banks from the scene and the rise of trading companies and foreign banks, both of whom operate under limited or little regulation, may not be a long-term benefit to consumers. WF Whelan’s return to the sector, therefore, should be seen as a welcome development and one we hope, for the benefit of consumer, will be mirrored by other logistics firms in the US market.