London 18/09/2015 - The LME's queue-based rent caps (QBRC) will be detrimental to the exchange if introduced, Alcoa warned.
The proposed measures, coupled with the burdens placed upon warehouse owners by rule changes such as linked load in/load-out rates, could risk warehouse operators losing interest in operating LME-listed warehouses, potentially lowering storage liquidity, the aluminium producer said.
"QBRC would significantly change storage economics for warehouse owners and may cause them to reduce the storage capacity they make available for LME-registered metal, potentially threatening warehouse liquidity," it said in a letter to the exchange.
There are around 685 warehouses in the LME system around the world but the spate of recent delistings may continue and even escalate, it added.
For example, Trafigura-owned warehouser Impala Far East withdrew its Asian LME sheds before pulling out of warehousing altogether in China. It now only has nine LME sheds, all of which are in Antwerp.
"The potential for further reductions in LME warehouse capacity could negatively impact the warehouse system's ability to absorb - and also its willingness to absorb - a large surplus of aluminium in the event of a significant market oversupply situation such as the one experienced less than five years ago during the economic crisis," Alcoa said.
But it is not part of the LME's mandate to ensure metal goes solely into LME-registered warehouses, exchange CEO Garry Jones said at a press conference in July.
"We have to make sure LME network works for the LME and not that it is holding all metal in the world," head of business Matt Chamberlain added.
Under the proposed measures, warehouse companies that fail to deliver out metal held in queues within 30 calendar days would be required to halve the maximum published rent charged to the affected metal owners.
After 50 calendar days, no rent could be charged at all, removing any economic benefit for warehouse companies in maintaining a queue. QBRC could be implemented on May 1 next year, the LME has suggested.
It recently completed a consultation on QBRC as well as an increase in the minimum load-out rate for metal stored in approved warehouses. The results are expected in the next few weeks.
Alcoa is concerned that QBRC would lower the maximum inventory level that any individual warehouse would be willing to accept.
"It is highly unlikely that a warehouse will be interested in holding large inventories - particularly if such inventories are concentrated in a relatively small number of owners - knowing that cancelled warrants will result in free rent," Alcoa said.
Warehousers fear that metal owners could cancel large volumes of metal that the warehouse would not be able to process, allowing the metal owner to get free storage. But the LME has stressed that it would consider such behaviour abusive.
If QBRC is implemented and LME warehouse owners decide to limit their maximum aluminium inventory to a volume that can be loaded out in not more than 50 days, available storage would fall to around 6.4 million tonnes, down 57 percent from the current estimated levels, Alcoa claimed.
At present the LME holds 3,232,950 tonnes of aluminium of which 1,136,025 tonnes is booked for removal.
Alcoa also sent a letter to the US CFTC recently, accusing the commission of overstepping its authority in attempting to influence the LME's warehousing reform by delaying the exchange's application for registration as a foreign board of trade (FBoT).
(Editing by Mark Shaw)