London 16/11/2012 - The London Metal Exchange (LME) proposal for LME-registered warehouses to release 500 tonnes of non-dominant metal from locations holding at least 30,000 tonnes of a dominant metal should release other metals from being stuck behind aluminium in queues, said LME CEO Martin Abbott.
However, he warned that there was the possibility that other metals could then start to be held as collateral in financing queues.
“There is now the possibility that someone financing the metal will take a look and think 'excellent', now we will go and do all the copper because we can get that out’, and will take it out and finance that somewhere,” said Abbott.
“It would be wrong of us to say who may cancel warrants and what they may do with it when they do. I hope that other metals do not become chips in the financing game, but let’s not pretend we don’t see that as a potential consequence.”
The decision to make the criteria 30,000 tonnes was because at full load-out rate, this would be the equivalent of two weeks of delivering out, which the LME believe is a reasonable benchmark for measuring the impact of queues.
Meanwhile, 500 tonnes was decided as there are very few single consumers that would use that tonnage of a metal in one day, and releasing too many tonnes per day could only exasperate the problem.
“Financing groups would think now they can get even more metal, faster, and move it off-warrant, away from the market and into a finance centre,” said Abbott.
Additionally, 500 tonnes will address the need of consumers, while being realistic for warehouses logistics.
“No point saying 6,000 tonnes, as you are not going to get that metal, there are not the trucks. It can’t be done,” added Abbott.
Increasing the load-out rates will have consequences, said Abbot and the market cannot reasonably expect to increase the obligation on warehouse companies without seeing a knock-on effect in rents.
The LME invited response from warehouse companies over the proposed changes, with a deadline of December 7.
“If it is going to cost them more money, then they will have the chance to reflect that in their schedules,” said Abbott referring to the end-December deadline for warehouse companies to alter rates, which would then come into effect in April 2013.
CHINESE WALLS
With banks now owning a large chunk of LME warehouses, some participants have complained that it is a conflict of interest and that the LME should not allow the practice. However, Abbott, disputes this.
“Banks owning warehouses does not change anything, it is irrelevant who own the warehouse. Creating queues, financing stocks, is not dependent on the ownership of warehouses.”
Abbott said that “Chinese walls” were in place to stop any conflict in interest, while the LME cannot stop financers from owning a warehouse, as competition laws would not allow it.
“Up to a point [the LME] can decide on Category one and Category two members, but in order to be a member they must fulfil certain regulatory and capital requirements...we do not operate a private members club. If you meet these tests, then you are in,” said Abbot.
“We have rules that say there have to be sufficient Chinese walls between the warehouse and any trading company,” said deputy chief executive Diarmuid O'Hegarty, adding that these Chinese walls are regularly assessed.
(Editing by Martin Hayes)