London 28/09/2016 - The London Metal Exchange (LME) has decided to implement charge capping (CC) measures for warehouse operators. These will come into effect on December 28, it said on Wednesday.
As the final part of its reform programme, the LME will introduce an initial schedule of maximum rates for warehouse rents and free-on-truck (FOT) charges by calculating the average of the highest published charges for the years 2015-16 and 2016-17, on a per-metal and per-country basis.
This schedule of charge caps will be frozen for five years, during which time 'real-world' prices are expected to converge closer with the frozen published rates. After that, the maximum prices will be updated annually, based on the per-country consumer price index (CPI).
"The LME believes that CC as proposed will prevent the steep increases in headline warehousing charges seen in recent years, improving the efficiency of the year-end rate setting process and allowing all participants to compete on a level playing field," it said.
"The LME has a duty to the entire metals community to run a fair and orderly market and the action we have taken over the last three years has strengthened our ability to carry out this responsibility," LME CEO Garry Jones added.
In response to the consultation, eight respondents were in favour of the measures and said they were likely to bring order to what was previously viewed as an undesirable situation by introducing a level playing field.
Three respondents were against the measure, one of which said that it did not agree on the basis that they it believed in a free and competitive marker but added that it would consider the proposal should the LME adopt a "constructive" approach.
Another objected, feeling that the measures represent a form of anti-competitive price-fixing that could create an inefficient market. Another respondent added that CC would remove a significant element of commercial judgement and potential competitiveness from the warehouse sector.
There are also concerns that the recent tighteneing of regulations aimed at cutting queues in LME-listed sheds has not yet been truly felt. One participants said the disjointed and complicated nature of the other initiatives had made it "impossible for warehouse companies to fully comply, resulting in overall user frustration with the system".
In initial submissions from warehousers for 2016-2017, the stockweighted average increases for rents and FOTs were significantly higher than in the previous two cycles at 10 percent for rents, up from a three-percent annual rise in the previous two years, and 12 percent for FOTs compared with two percent previously.
The LME provided a one-off window for warehouse operators to alter their proposed increases before April 1. Reuben Brothers-owned Metro lowered its daily rent in Detroit to 60 cents from 72 cents and Istim - the Whelan family business - also cut rates there to 56 cents from the previous 60 cents.
But the exchange was still "disappointed" even after these reductions and subsequently drew up the discussion paper.
Warehouse operators must now submit charges for the 2017/2018 period by December 29; these will come into effect on April 1, 2018.
Warehouse operators arew all widely expected to submit charges at the top end of the allowance. The LME had previously said it would consider CC due to competition laws - setting a cap could create a race to the top, making the market uncompetitive. But the warehouse industry operates to a greater degree on an incentive basis to attract metal into sheds.
(Editing by Mark Shaw)