London 24/11/2015 - The London Metal Exchange (LME) will introduce queue-based rent caps (QBRC) as planned following an extended consultation that also covered load-out rate increases (LORI) and anti-abuse measures, it said.
In fresh measures aimed at ending the long waiting times to get material from LME-listed warehouses, the LME proposed to roll out QBRC from May 1 next year.
"A later date may risk affecting the LME's assurance to the FCA that its warehousing arrangements are operating in a way that enables it to satisfy its regulatory obligations... and the LME believes that this risk outweighs the impact of any potential litigation not being resolved prior to May 1, 2016," it said on Wednesday.
The move comes despite complaints from warehouse operators that QBRC would allow metal holders to get free storage. And while the exchange countered this by stating its intention to implement anti-abuse measures, some warehousers believe that loopholes will be found and exploited.
The QBRC rule compels 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.
The LME announced an extension to the consultation period in September to allow comments on its new proposed anti-abuse provisions to quell warehouse owners' fears of manipulation. It received 13 responses, the exchange said today.
"Broadly, four supported the implementation of LORI and QBRC, three offered moderate support for either LORI or QBRC, four were opposed, one was ambiguous and one did not directly deal with the matters under consultation, but made a broader comment about market structure," it said.
"Some responses offered potential amendments to LORI, QBRC or both," it added.
Following feedback from its members, the LME 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.
The QBRC clock that calculates when the 30 or 50 days have been reached would match the load-out schedule established between the warrant holder and the warehouse company, meaning that not all the cancelled metal would become rent-free after 50 days.
Yet some warehouse owners said that the convoluted process was still open to abuse, predicting that large volumes of material would start to be cancelled particularly in locations such as Vlissingen where there are substantial tonnages of aluminium, which would lengthen queues.
Indeed, this has been the case. The queue at Vlissingen has nearly doubled since the proposals was announced - the cancellation of around half a million tonnes over a seven-day period earlier this month extended the queue there to 16 months.
Prior to the proposal, the queue was at a four-year low of eight-and-a-half months.
The LME acknowledged that the introduction of QBRC - or even the anticipation of its introduction of QBRC - might result in the greater cancellation of metal, admitting that these rules could be responsible for the increase.
"[But] the short-term impact of likely increased cancellations and the potential initial queue increases do not offset the medium-term benefit to the network of the protections afforded by QBRC, particularly since QBRC itself provides a degree of relief from the effects of any queues which may be thus created," it said
Global LME-listed aluminium stocks have now dropped below three million tonnes to their lowest since February 2009. At the start of the year there were more than four million tonnes of stocks in LME-listed sheds and more than five million tonnes in 2014.
The LME has implemented a wide-ranging overhaul of its warehouse rules, including linked load-in/loud-out (LILO) rates, since it was acquired by Hong Kong Exchanges and Clearing (HKEx).
Under LORI, which will come into effect in March next year, the exchange will apply daily load-out requirements to all warehouses with more than 150,000 tonnes of metal in one location - currently, it affects warehouses that store 300,000 tonnes or more.
And warehouses with more than 900,000 tonnes of metal - currently, only Pacorini in Vlissingen is affected - will have to deliver 4,000 tonnes per day instead of 3,000 tonnes per day.
Queues had been fallen sharply at bonded warehouses, partly due to LME rules and partly due to tighter credit conditions. Meanwhile, the US Federal Reserve is looking at raising its interest rates, which would make the financing of metal far less attractive and thereby shorten queues further.
(Editing by Mark Shaw)