London 20/12/2012 - The London Metal Exchange (LME) will alter its warehouse delivery rates from April 1 next year, the exchange said in a release on Thursday.
Following a review, the LME proposed on November 15 that LME-registered warehouses with cancelled warrants of at least 30,000 tonnes of a dominant metal will be required to deliver out a minimum of 500 tonnes per day from that location of non-dominant metal - provided that such deliveries are requested.
Warehouse companies were given until December 7 to submit their views to the LME.
“The exchange received written responses to the consultation from four warehouse companies. Of these responses, three warehouse companies queried the general purpose of the proposals and had issues with specific details of the proposals. The exchange will be responding in detail separately to each of these warehouse companies,” said the report.
The LME did accept one suggested amendment. In the initial proposal, it worded the change as an "additional" 500 tonnes per day of a non-dominant metal to be delivered out but has since altered this to a "minimum" of 500 tonnes per day.
The increase has been agreed to free up other metals that are prone to becoming stuck behind aluminium in queues. It established 30,000 tonnes as the minimum level of stocks at which the new rules come into play because at the full load-out rate this is the equivalent of two weeks of delivering out, which the LME believes is a reasonable benchmark for measuring the impact of queues.
It set a 500-tonne minimum for delivery out of a non-dominant metal in such circumstances because very few single consumers would use that tonnage of a metal in one day - releasing too many tonnes per day could only exacerbate the problem.
“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,” LME CEO Martin Abbott said at a press conference shortly after the proposal was announced.
The LME's proposals have been welcomed by those who are confident that access to material, such as copper, which is often caught up in the long queues behind aluminium and zinc - particularly in New Orleans - will accelerate.
“It’s a step in the right direction,” one such source said.
But others warned that the cost and logistics of the new measures will provide complications.
“[The additional requirement to deliver out 500 tonnes] will definitely affect the warehouse companies,” a warehouse source said. “What people fail to understand is that 3,000 tonnes per day is not easy to begin with. You can’t find that many fork-lifts or trucks. It is logistically complex and labour intensive.”
“At the moment cancelled warrants tend to be big blocks of 200,000 or 300,000 tonnes so it is logistically easier to deal with - you don’t have to dig,” he added. "What is unclear is to what extent we are going to have to go digging for the extra 500 tonnes. If we have to go digging, it will be expensive."
FEE INCREASES SET TO FOLLOW
Higher load-out rates will have wider consequences, Abbot said - the market cannot reasonably expect to increase the obligation on warehouse companies without a knock-on effect in rents.
There will be an increase in fees this year to reflect the additional costs of higher load-out rates, several warehouse companies have said.
“Unfortunately, fees will be going up,” a second warehouse source said. “The new regulations make a big difference to the outloads and will add to costs.”
“It’s all done and the LME will publish the new rates soon [usually on the last day of the year],” the first warehouse source said. “It will be a smaller percentage increase than last year but there could be a differentiation in locations."
There may be a bigger increase at locations where the costs involved are potentially higher -in other words, where there are queues. The FOT rate will also increase.
“There’s going to be higher fees because we are faced with higher costs,” the first warehouse source said.
(Editing by Mark Shaw)