London 02/10/2015 - Warehouse owners who operate LME-registered sheds have reacted in mixed fashion to the exchange's proposal to bring in anti-abusive measures on the planned queue based rent cap (QBRC).
While some believe the convoluted process remains open to abuse, others welcomed the move.
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.
Earlier this week the exchange extended its consultation into warehouse reforms - most notably QBRC - amid concerns that the proposal was open to abuse and could result in metal owners cancelling large tonnes of material to get free storage.
Following feedback from its members, the LME has proposed to implement a 10,000-tonne limit on the amount of material that can be in a queue for the QBRC rule to be applicable.
"I am supportive of the measure - it would have been unfair on warehouse owners if suddenly there was a run of metal being cancelled. I think it is pretty likely to get the go-ahead," a warehouse source said.
"So long as you do not see 20 or so metal owners all cancelling material in one go, warehouse owners will be better off. It also means the chances of litigation from warehouses against the LME is lower," a second source said. "People will not be able to rely on making a queue for rent free stocks - the stop-clock only starts again once it has been delivered."
But concerns remain that even this measure is open to abuse, while there are questions about how it might work in practice work.
"It's very wishy-washy, there are many loopholes and it's open to interpretation," a third warehouse source said. "You can't have your barrel full and your wife drunk at the same time and this is exactly what they want to do."
While a fourth warehouse source believes the LME is moving in the right direction, he suggested the system is still open to abuse as it stands.
"What is to stop fronting by doing 10,000 tonnes direct, 10,000 tonnes through one broker and 10,000 tonnes through another?" he said.
Still, the LME's proposal identifies the same warrant holder as the underlying user cancelling metal through multiple brokers.
There is the potential for a warrant holder or several warrant holders acting in concert to sidestep this rule by cancelling metal in a number of separate clips, the LME said
"Accordingly, in the event that a cancellation is made by a warrant holder already holding metal in the queue (or acting in concert with another warrant holder or warrant holders holding metal in the queue) at the same delivery point (DP) warehouse, the deemed cancellation date, and hence the QBRC 'clock', would be adjusted in respect of the metal already in the queue," it outlined.
But the policing of this may prove difficult in practice, some observers said. Any abuse of the anti-abuse system should be flagged by the exchange's proactive monitoring, FastMarkets understands.
"The new measures are layered to stop abuse and I think this is a sensible measure but I am sure that someone would find a way around it. But this shoots that albatross for now," the first warehouse source said.
NEW MEASURES 'NOT NEEDED'
While warehousers are generally pleased the exchange has acknowledged their concerns, several said that the QBRC measures are unnecessary in the first place.
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.
And the US Federal Reserve is looking to raise interest rates, which would make financing metal far less attractive and thereby shorten the queues further.
"Metals are driven by market forces and market forces have always -and will always - correct anomalies. In our market there are natural lags due to the fact that production does not respond immediately to demand changes - as opposed to oil where it is easy to curb or raise production in little steps," the fourth source said. "They should just let things be."
One senior market participant attributed the build-up of queues by holders cancelling vast tonnages to move to another location and were not a symptom of warehouse operators being "too slow".
The new rules will also have a direct impact on trading behaviour, the second warehouse source said.
"If a trading house tries to take delivery of a lot of material, this will make it difficult - it will negate the cost benefit of going through a warehouse and they will go direct to a producer instead," he added.
Warehouse operators also hit out at the vast number of changes and continued uncertainty about the exchange's regulations.
The LME has implemented a wide-ranging overhaul of its warehouse rules since it was acquired by Hong Kong Exchanges and Clearing (HKEx), including linked load-in/loud-out rates.
"The LME keeps bringing out new rules and regulations and it makes it difficult to keep up," the first source said. "It is hard to devise a business strategy if they keep moving the goal posts."
"As a warehouse we need clear direction to support long-term strategies, but the LME with its ever-changing rules is leaving us in the dark," the third source added.
But those warehousers who are now complaining about the lengths to which the exchange is prepared to go to cap queues "have left it too late to speak up", the second source said. "They should have voiced their concerns years ago," he added.
The exchange said on Wednesday that it was "minded" to introduce QBRC.
(Additional reporting by Perrine Faye, editing by Mark Shaw)