Reuters: Regulatory News: UPDATE 2-LME to cut metal queues to 50 days, review owners pact

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UPDATE 2-LME to cut metal queues to 50 days, review owners pact Nov 7th 2013, 12:03 Share this Email Print Reprints Thu Nov 7, 2013 7:03am EST * LME acknowledges "very significant" polarisation of opinions * LME to act on incentives warehouses offer to traders * 50-day queue threshold to remain under constant review By Maytaal Angel and Susan Thomas LONDON, Nov 7 (Reuters) - The London Metal Exchange tried to appease critics of its global warehousing network on Thursday, slashing wait times for metal to 50 days and announcing a review of its agreement with warehouse owners. The world's biggest and oldest metals marketplace is under increasing regulatory and legal pressure over its controversial storage practices, with complaints about long queues and large surcharges to withdraw material from its warehouses. "We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging," said Garry Jones, chief executive of the LME. The exchange said it would act to prevent what it called "queue incentivisation". Warehouse owners in the LME network were widely reported to be offering incentives to attract metal to back-logged locations, in a bid to boost rental revenues. The LME also said it had started a legal review of what steps it can take on high storage charges including rent, and is looking with lawyers at the effectiveness of the agreement it has with warehouse companies. In July, the LME proposed new rules to overhaul its delivery system from next April that would force warehouses to release more stocks once the wait time breaches 100 days. Its new plan cuts that to 50 days, and it said it would keep that figure "under active review". The exchange acknowledged, however, that there was "a very significant polarisation of opinion" on the issue. Industry insiders were already divided on the outcome. "The overall plan sounds like a very reasonable step. But some people will be very unhappy because it takes the floor out of their business model," an industry source said. LUCRATIVE BUSINESS Since LME rules allow warehouse operators to deliver only a trickle of metal to customers compared with how much they take in, huge backlogs have built up. This has been lucrative for the warehouse owners, including investment banks Goldman Sachs and JPMorgan and global trading houses and miners Glencore-Xstrata and Trafigura, since they earn rental income for the metal caught in the backlogs. Goldman Sachs and Glencore declined to comment on the LME's new plan. JPMorgan, which is in the process of selling its physical commodities assets including its warehousing business, declined to comment. Trafigura's head of non-ferrous and bulk commodities, Simon Collins, said the trade house welcomed the LME's "bold reforms to its warehousing policy ... We are delighted to see that the LME board has gone further than its original proposals". But some traders were still unhappy. "Any day over one day is a disgrace to a free market," metals trader Anthony Lipmann said. "There is no proportion of days for getting your titled goods that you own from a warehouse that is right beyond immediate delivery. The metal trade for its safe and orderly function requires nothing less than immediate delivery." Societe Generale analyst Robin Bhar said the proposal would not accelerate the amount of metal available for the market. "Will it have a significant impact on the market? I don't think so," Bhar said. "I think it's really going to accelerate the relocation of stock away from the visible LME system to the hidden non-LME system." The 136-year-old LME hopes the plan will head off an escalating crisis over its warehousing policy that has drawn scrutiny from UK and U.S. regulators and ease frustration among industrial users, including beer and can maker MillerCoors LLC and Novelis, which manufactures sheet used to make cans. "Frankly I think it (the plan) is a very good paper. The only problem is that it begs the question, why has the LME maintained for years that there wasn't a problem," a senior industry source in London said. Link this Share this Digg this Email Reprints

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