Is the LME Warehouse System in Crisis?

Never let it be said that metals markets are not dynamic (and I am not talking about metals prices).
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After the financial crisis, the one area of the market that was making money was the stock and trade financiers, plus the warehouse companies on whom they depended for safe storage. In 2010, Goldman Sachs bought Metro for some $450 million and proceeded to cream the market as inventory swelled to record levels. Stuck behind massive load-out queues, warehouse companies pulled in guaranteed rents.
But following implementation of strict LILO and queue-based rent capping (QBRC) rules by the LME, queues ran down and, maybe coincidentally (do you believe that?), the grey market stock and finance firms exited the LME warehouse system in droves.
According to FastMarkets, total stocks in LME-listed warehouses are currently just above 2.5 million metric tons, down from their peak of 7.6 million tons back in July 2013 (before the warehousing reforms were bought in). In Europe, the total area allocated for LME metals storage sheds dropped by 18% from June 2017 to 2018, down to 1,747,114 square meters. Previously, Glencore dominated Vlissingen, more than half of warehousing space has gone in the past year.
The situation is arguably even more brutal in Asia.
Busan in South Korea, plus Malaysia and Singapore — locations that all expanded rapidly a few years ago — have seen volumes collapse.
In Singapore — home to most LME aluminum metals in Asia, according to FastMarkets — live aluminum stocks have plunged by half to 91,725 tons over the last year, while Busan has seen a 71.8% drop in aluminum from a year ago and a 66.6% drop in copper.
It could be tempting to brand firms exiting the market to rats abandoning a sinking ship — but who can blame them?
With falling volumes, it is proving tough to turn a profit.
Noble sold out to Australian and Singapore investors in early 2017 and its Worldwide Warehouse Solutions (WWS) has now gone bankrupt, while Katoen Natie of Singapore has closed its LME operations in Asia following irregularities. Henry Bath, a firm that has seen markets rise, fall and rise again over more than 200 years of trading, and will likely ride out these trials, has taken over their sheds.
Warehouse companies put the swift decline in margins down to a fall in volumes and the exodus of the stock and finance trade. LME stocks of aluminum at 1.145 million tons have returned to where they were before the financial crisis.
According to CRU data quoted by Reuters, shadow stocks held off warrant but often in the same warehouses as LME stocks have fallen from 10 million tons at the start of 2016 to just over 6 million tons at the end of Q2, and are still falling. That is a massive loss of revenue for storage firms and in part explains why the big names, both in warehousing and finance, saw the writing on the wall and got out in recent years.
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So, this is an industry that is maybe not in crisis, but is certainly facing challenges and radical change.