By Ese Erheriene
The London Metal Exchange on Wednesday launched another round of
proposals to improve its warehousing operations, which have been
criticized for the long delays, particularly for aluminum.
The LME's consultation, which will close on Aug. 17, aims to
increase the speed at which metal is moved into and out of
warehouses, and would impose a cap on the rent charged for metal in
warehouses that is waiting to be moved out, according to an LME
statement.
"The proposals we are putting forward today are necessary to
ensure that remaining queues and related issues are addressed in
accordance with our regulatory obligations and original aims," said
Garry Jones, the LME's chief executive.
It is the latest move by the LME, owned by Hong Kong Exchanges
& Clearing Ltd., to try to resolve the delays in shipping
aluminum out of some of its key warehouses. In some cases,
companies have had to wait for up to two years to get their hands
on aluminum, causing financial costs and operational
inconvenience.
Those delays have put the LME under considerable pressure. Late
last year, the body was excoriated by a U.S. Senate commission,
which concluded that warehouse delays "have likely added billions
of dollars in costs to a wide range of aluminum users, from beer
makers to car manufacturers to defense companies that make warships
for the Navy."
The Wall Street Journal reported earlier this year that the U.S.
Commodity Futures Trading Commission has so far held out giving the
LME a license to operate its electronic trading platform in the
U.S. as a result of the bottlenecks. In the U.K., the Financial
Conduct Authority has said it is monitoring the warehouse
situation.
The LME refused to say whether the latest reforms were drawn up
to help smooth the path for CFTC approval.
"The CFTC have a number of foreign exchanges that they're
approving...and we're in the queue with the rest of them," said Mr.
Jones at a press conference.
The LME has changed the rules several times this year already,
primarily targeting those warehouses with delays of more than 50
days. In February, the LME said that for every two tons of metal
received by those warehouses, one ton would have to be shipped out.
In April, that was tightened to one ton out for every ton taken in.
Then, in June, the LME launched a new range of aluminum contracts
to allow users to protect themselves against rising regional
charges that occur in addition to the cost of the metal.
But those modifications were criticized by some customers, who
complained they weren't having much impact.
Colin Hamilton, a metals analyst at Macquarie, said that as a
result of the moves, the premiums paid by companies to obtain
physical metal would decline, as there would be more metal
available on the market.
Waiting times at three of the five worst-offending warehouses
have been eliminated; queues at the last two in Detroit and in
Vlissingen, the Netherlands, have been harder to tackle.
Now, the LME wants to target all of its warehouses, raising the
minimum amount of metal they ship out every day to clear backlogs
faster and prevent future buildups. Warehouses with more than
150,000 tons of metal would face a sliding scale of minimum
shipments, of between 2,000 tons and 4,000 tons a day, depending on
the volume of metal stored in the warehouse. The measure would be
introduced in December, the LME said.
At the same time, the exchange wants to stop its registered
warehouses charging rent on metal that has been waiting to leave
for more than 50 days. This change would be introduced in May 2016,
the LME said.
Under these new rules, the LME believes queues in Vlissingen and
Detroit would disappear by the end of March and April next year,
respectively.
According to the LME, the rule changes have been staggered
because of their complexity. The modifications announced Wednesday
address the final two parts of a package of reforms that the
exchange presented in 2013, though LME officials said more changes
could be considered, depending on the impact of the latest
proposals.
Write to Ese Erheriene at ese.erheriene@wsj.com
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