London 14/07/2016 - The London Metal Exchange (LME) has initiated a market-wide consultation proposing to control warehousing costs by imposing caps on maximum charges.
If enacted, the first capped charges would come into effect on April 1 next year, the exchange said in a release today.
In April, the exchange put forward for discussion a series of measures aimed at ending ever-increasing warehouse rent and FOT rates, which it deemed out of line with the economic cost. Initial charge increases submitted this year averaged 10 percent for rent and 12 percent for FOT.
Today, the LME proposed to set the initial schedule of maximum rates for warehouse rents and free-on-truck (FOT) charges by calculating the average of the highest published charges for the years 2015-16 and 2016-17 on a per-metal and per-country basis.
This schedule of charge caps would be frozen for five years during which time it expects "real-world" prices to converge with the frozen published rates.
After that, the maximum prices would be updated annually based on the per-country consumer price index (CPI).
The consultation document also outlines a proposed process to set caps for new countries or contracts added to the LME network and an appeal procedure for warehouse operators to accommodate material changes in their economic circumstances.
The caps will apply to the maximum or headline rates. Warehouse operators will still be free to charge less than the cap in each country.
The consultation will be open until August 19; the LME hopes to publish its conclusions by September 30 and aims for any revised policy to take effect following the 90-day notice period required under the LME Warehouse Agreement - by December 29 in time for publication of the 2017-18 charges, it said.
"After conducting an extensive discussion process, the LME believes that a fair and straightforward approach to this very complex issue would be to cap these maximum rates and to impose a medium-term freeze on increases," LME head of business development Matthew Chamberlain said.
"The result is the simple solution we are proposing today, which we believe will bring clarity and stability to the industry, with minimal market disruption," CEO Garry Jones added.
(Additional reporting by Kathleen Retourne, editing by Mark Shaw)