FOCUS: LME Asian warehouses expansion stalls, European storage down by a fifth in 2017

After a two-year period of super-fast growth, the expansion of London Metal Exchange warehouses in Asia slowed significantly over the past year. But what lies behind the change - especially as LME storage space in Europe has also continued to dwindle?

Warehouse space at the nine LME delivery locations in Asia grew by just 3% to 1,608,813 sq m  in the year to June 2018, largely due to plunging on-warrant metals volumes and stretched margins led by intensifying competition.
The flat growth is in sharp contrast to the aggressive expansion from June 2015 to June 2017 when LME warehouse space in Asia mushroomed by nearly 70%, led by growth in Malaysia and South Korea.

In South Korea’s major port city, Busan, a fresh area of 210,176 sq m  was listed as storage space for LME-registered metals during the two-year period, but only 6,049 sq m was added to that between June 2017 and June 2018, the latest LME data shows.

“In Asia, [South Korea] used to be flooded with aluminium – there were stockpiles everywhere, even blocking emergency exits in sheds,” a warehousing source said. “But it’s gone down massively. There are a lot of empty warehouses in [South] Korea and Malaysia and very cheap space being offered all the time.”

LME on-warrant aluminium stock in Busan dropped by 71.8% from a year ago to 29,125 tonnes at the end of June. And live copper stock in Busan shrank by 66.6% to 144,450 tonnes over the same period.

“Expansion was fast in Busan. They have already reached a point that there are not many metals that need to be stored on LME warrants,” another Southeast Asia-based warehousing source said.

He said that, as was the case with most new warehouses, some have been attracting metals by offering incentives and low rents.

“The rents are so low that it is difficult to cover fot (free-on-truck) charges, so of course they won’t want to expand.” he added.

A similar story is happening in Singaporean sheds – home to most LME aluminium metals in Asia – where live aluminium stock plunged by half to 91,725 tonnes during the period, exchange data shows.

That is hardly surprising, because LME warehousing space in Singapore has shrunk by 6% from a year ago to 204,036 sq m and Singaporean operations run by WWS and Katoen Natie have recently been delisted by the LME.

In late June, WWS was delisted by the LME over financial concerns and its Singaporean operations have already been handed over to rival Henry Bath which shares the same terminal in Singapore.

Katoen Natie’s Singaporean sheds also went to Henry Bath, according to a LME notice on July 6.

“Margins for warehouse companies are ridiculously low now – it’s very difficult to make any money and it’s getting worse, not better.” the first warehousing source said. “Stocks are going down and will keep going down for months if not years.”

Total stocks in LME-listed warehouses are currently just above 2.5 million tonnes – down from their peak of 7.6 million tonnes back in July 2013, before the warehousing reform including implementation of the ‘punitive’ queue-based rent capping (QBRC) rule.

Dwindling stocks have also led to diminishing LME metal storage space in Europe.

The total area allocated for sheds dropped by 18% year on year to 1,747,114 sq m in Europe at end of June. And in Vlissingen alone, more than half of warehousing space has gone in the past year.

So while there may be still a desire to have the LME stamp of approval for easier access to financing, LME business is no longer a main warehousing priority.

“If you look at the situation we have, the LME put a lot (LILO and QBRC) in place to solve the queues,” a metals trader said. “The queues are not an problem any more, but issues [remaiin]. Warehousing is not an easy game and if you cannot withstand the tough [times], then you can disappear pretty quickly.”

Additional reporting by Alice Mason and Perrine Faye in London  

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