Why LME Board May Not Have the Balls to Change Warehousing Rules

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It’s clear to see what the threat is to the LME warehouse companies (which we began laying out in Part One of this article): a mild dilution of their stranglehold on the market.

Delays at multiple locations of more than 100 days to access metal have resulted in 10-15% for prompt physical delivery of aluminum, a cost that falls on consumers while warehouse companies are reaping rents on metal they slowly release.

Reuters’ John Kemp made a useful proposal: simply withhold the right for LME-approved warehouses to issue warrant receipts for new metal until load-out rates have been reduced to what is considered an acceptable level. That may still amount to a month or more, but you can be sure the warehouse companies would find a way to deliver more metal if they were faced with such a restriction on new deliveries in.

Unfortunately, in all these discussions, a figure of 100 days keeps popping up as the limits for an acceptable delay – a figure that if not seriously challenged, is likely to become the new benchmark everyone aims for.

But that is still more than three months, during which time the owner of the metal has to pay rent, insure the material and finance the cost.

The irony is the warehouse companies are setting the pace on this, but they don’t own the metal. Reports that Goldman Sachs has been informally sounding out potential buyers for its warehouse units suggests the prescient trader probably has seen the writing is on the wall longer-term for what is, if not a rigged market, then certainly biased in favor of the warehouse operator.

If that bias is diluted, Goldman can see, the premium profits will be too, and now may be the time to get out. Let’s hope the board does not give in to lobbying by the warehouse operators – the warehouse system should be a service to the market, not a cause of distortion.

The new board knows that, but the question is, do they have the courage to do anything about it?

Read more from Stuart Burns.

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