London 30/09/2015 - The London Metal Exchange is still "minded" to introduce queue-based rent caps (QBRC) based on feedback from its recent consultation but has started a further two-week consultation on QBRC and load-out rate increases (LORI).
The extension will allow for comments on proposed anti-abuse provisions and quell warehouse owners' fears of manipulation, the exchange said on Wednesday.
The potential for abuse clearly resonated with warehouse owners - there was concern that metal holders could use the rule to get free storage, the LME said.
"People wanted us to go a bit further and for a specific anti-abuse system to be in place," Matthew Chamberlain, LME head of business development, said at a press conference here today.
The QBRC rule forces a warehouse to halve the daily rent it charges after 30 days of waiting time and not to charge rent at all after 50 days.
The QBRC clock that calculates when the 30 or 50 days have been reached would match the load-out schedule established between the warrant holder and the warehouse company, meaning that not all the cancelled metal would become rent-free after 50 days.
Under LORI, the implementation of which has been delayed until March next year, the exchange would raise the daily load-out requirements for all warehouses with more than 150,000 tonnes of metal in one location.
Warehouses with more than 900,000 tonnes of metal - currently, only Pacorini in Vlissingen is affected - would have to deliver 4,000 tonnes per day instead of 3,000 tonnes per day.
The exchange's anti-abusive measures would kick in if 10,000 tonnes of metal were cancelled in one go or cumulatively in the same location by a single warrant holder, according to the new proposal. This 10,000-tonne level allows a smaller owner to get full protection from QBRC, Chamberlain said.
While this raises the potential for metal holders to manipulate by booking, say, 9,000 tonnes at a time, freshly cancelled material would be added to any metal the owner has already booked for removal and is already in the queue, Chamberlain said.
This would not be done on a consecutive basis but as soon as metal booked for removal breaches the 10,000-tonne limit.
For example, if a metal holder books 10,000 tonnes for removal from a listed shed with a minimum load-out requirement of 4,000 tonnes per day, the first 4,000 tonnes signal when the "clock starts", Chamberlain explained.
The second 4,000 tonnes are still protected under QBEC for the duration of the original queue but there is no protection for the day that is added to the queue; the same applies to for the remaining 2,000 tonnes.
"If it is more than 10,000 tonnes, then it is appropriate that metal holders think about how long it would take to load that metal out," he said.
The 10,000-tonne level is open to consultation but Chamberlain said the LME believes it is a "fair amount".
Queues have already fallen sharply at bonded warehouses, partly due to LME rules and partly due to tighter credit conditions. The aluminium queues at Pacorini's warehouses in Vlissingen and Metro's sheds in Detroit have dropped to 8.5 months and 10 months respectively, the shortest waiting time in four years.
Meanwhile, the US Federal Reserve is looking at raising its interest rates, which would make financing metal far less attractive and thereby shorten the queues further.
"Interest rates may impact metal and behaviour but the exchange needs to be the master of its own destiny and should work out practices whatever the economic outlook," Chamberlain said.
The timing of the new consultation is not ideal - it falls midway between LME Week, which kicks off on October 12, and will not finish until October 14. This means that warehouse operatives will have to wait until after the event to formulate their business models.
"It is right we consult on this. We are open to all views from all the market – [warehouse operators] want clarity as soon as possible," Chamberlain said.
(Additional reporting by Perrine Faye, editing by Mark Shaw)