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The storage of London Metal Exchange-approved metal has probably never been so controversial.
Opinions over the rights and wrongs of the LME’s system differ not just among producers, traders and consumers, but also within warehousing companies themselves.
Whether you like the queues or not, the fact remains that warehousing firms appear to operate within the LME rules.
Of the 26 companies that operate warehouses in 37 different locations around the world, none has ever been found to have breached LME rules governing load-out rates, breached Chinese walls or failed to maintain their LME-approved facilities according to exchange requirements.
Neither has a consumer failed to get enough metal to run its operations effectively, including an enforced shutdown due to metal being stuck in an outbound queue in Detroit or Vlissingen, where companies each store more than 900,000 tonnes.
In fact, producers have found a home for their metal during a downturn, traders and banks have found a lucrative new income stream in the form of financing deals, and warehouse owners have never had quite such a bonanza.
Ultimately, metal in financing deals is still available – it just has a price attached. The rapid rise in premiums for physical delivery is just one part of the phenomenon.
Although it can be argued that everything links back to long waiting times to access metal, premiums are still at elevated levels across the world and in locations where no queues exist.
If nobody is actually doing anything technically wrong – and nobody is really struggling to get metal for consumption – then what is all the fuss about?
Something doesn’t smell quite right, but nobody can really put their finger on what it is. If the firms are operating within the rules, then do the rules need changing?
The LME warehousing system is designed to be the market of last resort. This means industry can turn to it as a source of material in times of shortage and sell to or place excess stock in it at times of oversupply.
Many industry participants, including LME ceo Martin Abbott, have noted that the storage system is being used for financing deals, making it an alternative spot market for banks and traders to turn to as the market of first – and not last – resort.
So, does the LME regulate against financing deals, which would lead to even higher queues as companies seek to pull metal out of official store and lead to the collapse of aluminium prices to the detriment of producers worldwide? Such an idea seems unworkable and highly unlikely.
The warehouse system is far from perfect, but it works pretty effectively in many instances.
Tensions over load-out rates may have simmered down in recent months, but the rumblings of discontent have never gone away.
Introducing separate load-out rates for individual metals might put a stop to future problems in getting nickel, tin, lead or zinc out of warehouses with queues between 11-14 months due to outbound aluminium deliveries.
It still doesn’t solve the problem with what to do about aluminium.
If a consumer were to complain, then perhaps the UK regulator might have to get involved.
To date, none are complaining too hard.
So, as the LME embarks on yet another warehousing review, the bigger question remains: is anything actually wrong?
Let us know what you think here or on our LinkedIn poll.
Andrea Hotter ahotter@metalbulletin.com Twitter: @andreahotter