LME Moves to Cap Warehouse Rent Charges

by on

An aluminum stockpile like this one has been seized by Homeland Security.

If you want a succinct analysis of activity or developments on the LME you have no further to look than posts by Thomson Reuters columnist Andy Home.

Two-Month Trial: Metal Buying Outlook

For years Home has bought clarity to the wider metal community around the goings on at London’s metals market. Often tinged with a certain witty tone, his observations are rarely off the mark. His latest article is no exception, reviewing the thorny question of how to justify the high cost of storing metal in a London Metal Exchange warehouse and the options the LME has to tackle what nearly all stakeholders agree is a long-running problem fraught with the risk of unintended consequences and the potential for legal challenges in multiple jurisdictions.

For a wider review check out the article link, but, in short, the conclusion is the LME’s preferred option is likely to be a rent cap. The alternative is changing the contract to free-on-truck, essentially wiping out load-out charges, a so-called nuclear option. It would have been fraught with risk of litigation under the multiple legal jurisdictions across the LME’s network.

Capping Rent: What is it Good For?

So, what would a rent cap do? In the short term, nothing. LME rents are so far above off-market rates the probable move to cap rent isn’t going to attract metal back into the LME system anytime soon. That, apparently, is part of the attraction. A rent cap does not constitute a dramatic change in the economics of warehouse operators’ business models.

However, the extent to which it does attract metal back in the future can only be a good thing for the LME and the market for each individual metal on the LME system becoming more visible as its movement can be tracked and gauged.

When the metal is off-market, it is invisible and large stock movements are probably occurring, with consequences for prices but with no way for the wider market to measure or understand those consequences. It may even have been driven in part by off-market movements of inventory, but we have little or no way of knowing if buy/sell trades on the LME are related to physical metal sitting in warehouses or are simply paper transactions.

Transparency is information and, for investors and traders, information is everything. Any move the LME makes that encourages financiers to store their metal in the LME system is a good thing. To remove the distortion that queues created is an added benefit that has, for the time being, largely already been achieved and was always a symptom of the financier’s game, anyway, not a direct cause of high physical delivery premiums.

Free Download: The July 2016 MMI Report

The LME’s efforts to control their warehouse operators’ activities have been going on since the market started. This is yet one more development in that ongoing process.

Leave a Comment

Your email address will not be published. Required fields are marked *