Winter Park, Florida 11/09/2014 - Warehouse operators are already behaving as if linked load-in/load-out rules have been introduced, a business strategy that has had a mixed impact on queue length to date, the London Metal Exchange said in a report on Thursday.
Earlier this year, Russian aluminium producer Rusal challenged the LME in London's High Court, alleging that proposed LME warehouse rules would create "severe hardship" for producers by artificially depressing the 'all in' price of aluminium.
On March 27, Justice Stephen Phillips sided with Rusal, ruling that LME's consultation was "unlawful" and "unfair" because the exchange failed to address other options. In particular, the court said that the LME consultation should have included a robust discussion on the possibility of the banning or the capping of warehouse rents.
This ruling forced the LME to suspend the implementation of a new linked load-in/load-out warehousing policies scheduled for April 1.
But warehouse operators are not naïve, understanding that even if the LME loses its appeal it can simply launch a new consultation to implement new rules.
Given this mindset, warehouses with large queues have been unofficially following the proposed LME rules under which they would be required to load out as much material as they take in where delivery queues exceed 50 days.
"The result of such behaviour has manifested itself differently in respect of the five warehouses with queues over 50 days," the LME said.
The warehouses with the three shortest queues - Impala Antwerp, Pacorini Johor and Pacorini New Orleans - have seen queues disappear entirely.
Still, waiting times at the warehouses with the two longest queues - Metro Detroit and Pacorini Vlissingen - have fluctuated month-on-month but over time have continued to increase.
"In the LME’s view, operators of potentially affected warehouses under the 2013 LILO rule are attempting to balance load-in and load-out, which is the most efficient mode of operation during the preliminary calculation period to avoid enhanced load-out requirements during the preliminary discharge period," the LME said.
"However, in the two warehouses with larger queues, there remain such significant stocks of uncancelled warrants that, even in the absence of significant net load-in, the cancellation of these stocks by warrant-holders will have the effect of increasing the length of the queue and the cancellation data clearly demonstrates the increased cancellation activity since July 1 2013," the exchange added.
There is an upper limit to this phenomenon, the LME pointed out - eventually all warrants in the warehouse will have been cancelled, at which point the queue by definition would fall under the operation of the 2013 LILO rule. But until that point, queues may continue to climb, as they have in Detroit and Vlissingen.
"In the view of the LME, the behaviour of potentially affected warehouses anticipating the potential introduction of the 2013 LILO rule demonstrates both the advantages and limitations of the LILO rule itself," the LME said.
One of its benefits is to stem the growth of stocks and therefore the maximum possible queue that could be built by the cancellation of warrants in that warehouse, it added.
"[But] the LILO rule cannot control the behaviour of warrant holders, and it is hence possible that queues rise before they fall under the effect of the LILO rule - indeed, given the likelihood that warrant holders cancel metal in the light of their expectation of greater load-out rates, such an increase is not just possible, but indeed probable," it said.
There is no guarantee that the LILO rule will be introduced, the exchange reiterated.
(Editing by Mark Shaw)