COMMENT: Summer storm rattles sheds, owners and exchange

Summer is not just for shelling peas, as the London Metal Exchange, some of its members and licensed warehousing firms found out over the past week.

Summer is not just for shelling peas, as the London Metal Exchange, some of its members and licensed warehousing firms found out over the past week.

The barrage began with a story in the New York Times on Saturday July 20, headlined “A shuffle of aluminum, but to banks, pure gold”, which quoted the views of forklift truck drivers, among others, on what lies behind the queues in Detroit.

A fusillade in a US senate subcommittee hearing into warehousing and the influence of banks on commodity markets followed on Tuesday July 23.

Democratic senator Sherrod Brown, who chaired the subcommittee, said the LME rules were “arcane and hard to understand”.

The hearing also seemed to accept as fact that aluminium consumers had to wait 18 months to obtain their metal. “Seems rather odd that a large buyer of any commodity can’t access that commodity in a timely fashion,” Republican senator Pat Toomey said.

Of course, it is not the case that consumers have to wait that long — though the premium they have to pay for prompt metal would cover the nominal cost of storing material for that long because of the attractive terms offered by financing deals.

The US senators blew hard...
The final salvo was fired by Alcoa’s ceo Klaus Kleinfeld, who took the opportunity to post his views to the Senate, in a document that called for the LME to report the details of speculative and corporate interest in positions on the exchange.

Any consumer that wants metal can contact him for it any time, he added.

(Incidentally, some are asking whether the LME recognised and worked hard enough to counter the substantial influence that large USA-based consumers, such as Coca-Cola and Dr Pepper Snapple, have on US legislators.)

Banks and the US Federal Reserve will be able to respond to the senators’ criticism at another hearing in September.

Our warehousing coverage looks at the implications of what took place in Washington, and the possible consequences and perils of the LME’s proposed new load-out rules. But there are other factors at play for those who trade on the LME, and those that own it.

…and the LME must deal with the wind
First, the proposals to link load-out rates at warehouses to queues and inflows, published at the start of July, might have kept Charles Li, the ceo of the LME’s owner Hong Kong Exchanges & Clearing, a little bit ahead of the tide of regulatory, political and media scrutiny that seems to be rising.

But there are questions — from LME brokers as well as aluminium consumers — about the lengthy lead-times. Market participants think the imposition of the rules is a foregone conclusion, and are asking whether the measures could not have been implemented well before next April.

Second, the claims in the senate hearing that the LME was not transparent by comparison with US exchanges will be seized on by other bourses, highlighting once again the battle to consolidate commodity trading volumes.

Perhaps the new furore over warehousing is just a summer storm.

But it is one that is set to keep Charles Li awake this year, just as it did last year, before he bought the London Metal Exchange.

For more on the LME warehousing issue, click here.

Alex Harrison
Twitter: @alexharrison_mb

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