Tag: Warehouse queues

London Metal Exchange Will Lower Fees, Settles for $10 Million With Metro

London Metal Exchange Will Lower Fees, Settles for $10 Million With Metro

The London Metal Exchange made news this week for cutting trading fees and retroactively slapping Detroit warehouse operator Metro International with a $10 million retroactive “settlement” long load-out queues that distorted prices.

LME Will Cut Trading Fees

The London Metal Exchange is expected to cut some trading fees, in a bid to arrest sliding volumes, but lower costs are unlikely to convince those already using cheaper alternatives — such as off-warrant storage — to return, metals industry sources say.

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Volumes on the 139-year-old exchange have been falling since trading fees were hiked an average 31% in January 2015. The drop has accelerated this year; in the six months to June volumes are down nearly 9% from the same period in 2015.

LME Hits Metro International $10 Million Non-Fine

Metro International Trade Services has just been hit with a $10 million “settlement” by the London Metal Exchange for its role in abetting the original load-out queue for aluminum in Detroit.

The subsequent splintering of the aluminum price between LME basis price and physical market premium caused collective outrage among manufacturers struggling to find ways to hedge the latter’s unprecedented volatility.

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Some are still pursuing Metro and its owner, Goldman Sachs, through the courts. The LME insists that the $10 million payment is not a fine but, rather, a settlement Metro agreed to in negotiations about the long load-out queues at its operation in the last three years.

LME Moves to Cap Warehouse Rent Charges

LME Moves to Cap Warehouse Rent Charges

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.

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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.

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.

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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.

LME Provides Insight Into LILO Reforms, Promises More Action Against Aluminum Queues

LME Provides Insight Into LILO Reforms, Promises More Action Against Aluminum Queues

The London Metal Exchange hosted a forum at Chicago’s Virgin Hotel last week and paramount on the minds of attendees was the Exchange’s recent clarification of “load-out” at warehouses, particularly those with long LME aluminum queues. The change was made to prevent the abuse of LME load-in, load-out (LILO) requirements.

The new definition of “load-out,” which went into effect February 1, states that metal must be shipped to a different warehouse operator or to a consumer in the same LME location, or it must physically leave the location altogether. This is to stop the so-called “merry-go-round” deals pioneered by Metro International in Detroit and that have taken hold at the Pacorini Vlissingen (Flushing) warehouse complex in Vlissingen, Netherlands.

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However, certain respondents in the LME’s consultation process indicated that participants would like to be able to temporarily use non-LME, or off-warrant, storage situated in the same warehouse complex, before the metal is loaded out per the revised definition. The LME has agreed to ask the physical market committee it created to address such questions to consider whether such a service could be allowed, while not diluting the protection against potentially abusive behavior provided by the new definition.

LME Warehouse and Product Changes Move Forward, Aluminum Queues Still There

warehouselock

The London Metal Exchange continues to move forward with reform of its warehouse rules even if, for those unfamiliar with the situation, the reform appears to be going at a glacial pace.

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The challenge the 138-year-old exchange faces is primarily one of trying to balance competition law across the 37 international locations in which it operates – what is legally enforceable in Baltimore may not be in Bremen or Busan. The LME has to move cautiously, give all parties the opportunity to discuss, review and agree to changes and, above all, try to avoid getting dragged into London’s High Court as Rusal so cynically did last year in an attempt to stall changes which it saw potentially damaging to the aluminum price.

Still in the cards are new rules to cap or ban rents for metal held up in exit queues, a move that, most agree, would result in a rapid deterioration of the load out queue as any incentive to keep the queue in place would evaporate the moment the rule change went into force. There is also discussion about capping the level of daily rents, possibly in recognition that millions of tons have been lost to the LME system as metal has flowed into non-LME warehouses under the stock and finance trade.

Not only is this a loss of revenue to warehouse companies, but also the LME in terms of the revenue it earns from those companies and, maybe most importantly, the opacity that is a result of metal being held out of view of the market. The size, scope and location of this inventory is a huge unknown for the market and markets hate unknowns, it increases volatility, reduces confidence and arguably the ability for accurate price discovery.

The LME rightly points out in a recent Press release that the simple announcement of planned changes to rules has had a beneficial impact on the market as warehouse operator behavior has tended to converge with the intended rule changes long before they have been able to come into force. The LME is managing to nudge the market into change even though the consultation process is making actual rule changes much slower to implement than they would like.

A definition has been accepted on what load out means – you wouldn’t think it was that hard would you, but the problem has been that some warehouses loaded out from one shed and loaded back in to another. As a result, queues effectively remained the same. That has now been banned, metal must be shipped to another warehouse operator, or to another consumer within the same warehouse, or to the outside market, but cannot be merry-go-rounded within the same facility and by the same owner.

The launch date for the long heralded aluminum premium contract has been set as October 26, a year or two too late for most consumers but better late than never. It will be interesting to see what uptake is like and whether its arrival has any impact on delivery premiums that latest data suggests may have peaked and be set to fall this year.

What LME Steel Billet Has to Do With Aluminum

Do you follow the steel billet contract? No? Well, you have probably been in good company in the past. The LME has struggled to make the steel billet contract work. In theory it was a splendid idea, steel billet is a ubiquitous commodity product that can be produced to a common set of standards accepted around the world and its price provides a good benchmark for long product supply and regional demand.

It also correlates well to scrap supply as many billet mills are electric arc furnace-based scrap consumers. Unfortunately, after initial interest the market shunned the contract and it became completely divorced from the physical market it was designed to reflect. However, the LME has made further changes and interestingly the price has dropped out of bed as this graph shows:

[caption id="attachment_66698" align="alignnone" width="300"]Source: Quandl Source: Quandl.com.[/caption]

This is actually a good thing, it suggests the market has reacted to changes the LME has made and maybe has the potential to become a fair price discovery product again. The LME is introducing cash settled rebar and scrap contracts in October to run alongside the physically delivered steel billet contract. It will be interesting to see how this new troika plays out.

So as the physical delivery premiums ease and changes in load-out rules move slowly forward, could we be seeing the end of the elevated physical delivery premium? Not in the short term; the western world is too tight for the premium to revert to pre-crisis levels but we could be seeing the beginning of the end. Given increased supply from China and outflows from the currently moribund stock and finance trade, supply to western consumers could increase over time – ironically just as products become more widely available to manage the risk.

[download-button url=”https://agmetalminer.com/monthly-report-metal-price-index-trends-february-2015/”] Download: MetalMiner’s February Price Trends Report[/download-button]

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