[Updated to add context and additional comments from the London Metal Exchange]
London 30/12/2015 - The London Metal Exchange (LME) is reviewing what it regards as "out-of-line" rent and free-on-truck (FOT) fee increases that its approved warehouse companies intend to charge starting on April 1, 2016, it said on Wednesday.
The stockweighted average increases for both rents and FOTs are significantly higher than in respect of the previous two cycles, being 10 percent for rents - compared to a three-percent annual rise in the last two years - and 12 percent for FOTs - compared to two percent for last year and the prior year, the LME said in a notice to members.
The charge increases are at the higher end of the range reported by FastMarkets on December 18, but below rates predicted by other news outlets.
They are also a direct reaction to new LME warehousing rules, which aim to shorten the long queues in certain locations. Some rules are already in place such as the linked load-in/load-out rates, while others like load out rate increase (LORI) and the controversial queue based rent caps (QBRC) come into play next year.
Many market participants believe that these tougher rules increase costs, which will drive metal into off-exchange sheds that are cheaper but also less transparent.
Metro International, which is owned by the Reuben Brothers, has submitted the sharpest rent increase to up to 72 cents per day per tonne for primary aluminium, while Pacorini Metals - the warehouse hurt the most by new LME rules - has put forward moderate increases to 52-53 cents a day for the same metal.
Istim, owned by the Whelan family that founded of Metro, comes second at 60 cents a day in the US, where they have LME-listed warehouses.
The LME does not have the power to cap rents and FOTs put forward by warehouses due to European Commission competition regulation, but the exchange has queried the economic rationale for the increases and is carefully examining the factors given to justify the revised charges, it said.
"The LME has always noted that one effect of the warehouse reform may be to cause warehouse operators to increase charges. However [...] these levels announced today appear out of line with market comparables and as a result, the increases do not appear to be based on objective economic factors," the LME added.
Rent and FOTs charged by warehouses for on-warrant metal are significantly higher than for off-warrant material, even for metal of the same grade stored in the same location, the LME noted, adding that it would "investigate this further as part of its consideration of whether or not to introduce rent caps."
In the run-up to the new rent fee submissions, the LME has requested information on potential increases and is investigating the factors warehouse owners have cited to justify the hike.
The exchange has mulled the possibility of implementing rent and FOT charge caps (CC) but thus far has adopted a "wait and see approach".
"Warehouses are reminded that, if CC were to be implemented in future, the total revenue per unit of metal may be reduced compared to the current ratecard," the LME said. "Accordingly, warehouses should consider the advisability of paying incentives during 2016-2017 on the basis of the full level of 2016-2017 rents and FOTs, given the possibility that such rates may full under a potential future implementation of CC."
Typically, metal owners do not pay the full rent as warehouses negotiate with owners in a bid to entice material into sheds by offering incentives. As of January 1, 2016 warehouse operators will begin reporting to the LME any incentive rent deals on an anonymous basis.
(Additional reporting by Kathleen Retourne, editing by Tom Jennemann)