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The London Metal Exchange has proposed further alteration to its rules concerning load-out rates for bonded warehouses.
We all know – because everybody, including me, has been talking about it for a long while – that the issue of warehousing is among the dominant problems the LME has to face at the moment.
The main talking point is the matter of the long queues that delay the loading out of certain metals from certain locations. A short time ago, the LME raised minimum discharge rates and put in special arrangements for the smaller metals. The results of the consultation period following those initial changes have now been considered and yesterday we saw the publication of the next proposal.
The requirement will be that a warehouse, which has a queue of 30,000 tonnes or more of one metal waiting for scheduled deliveries out, will be obliged to discharge an additional 500 tonnes per day of metals other than the so-called dominant one.
The LME is being sensible I’ve said several times that I don’t believe tinkering with load-out rates will be of much use in addressing the problem created by the queues, particularly the effect on the premium levels. I stick by that view, yet I think the LME’s suggestion is sensible.
Let me be clear. Adding the requirement to move 500 tonnes a day of metals other than the dominant one in any location will not ease the situation of the dominant metal at all.
If there is a queue of cancelled aluminium or zinc warrants awaiting load out in a location filled with those metals, the problem stays the same.
What the LME is doing, though, is addressing the issue that caused Vlissingen to be delisted for copper. I think it will be generally agreed that by far the majority of metal heading into consumers’ works does not come out of LME warehouse; it is shipped from a producer, either directly or through a trader’s intermediary.
In either case, the metal’s movement would not normally take in the LME warehouses. As a physical supplier, the LME is largely used to supply the small consumer who may not have a producer contract, or to help out as a result of delays or short-term extra need.
In other words, its function, in the physical world, is as a market of last resort. With this in mind, the obligation to deliver out 500 tonnes a day will largely fulfil that function.
So as far as it goes, I think the LME have got this one right.
Taking the heat off the warehouses The proposal will satisfy the needs of the small customer – or the large customer with an unexpected requirement – by making modest tonnages almost immediately available. That takes some of the heat off the warehouse problem in the short term.
What it doesn’t do, of course, is change the situation in, for example, the aluminium market. The LME implicitly recognises this point in its comment that the queues are “the result of broader macro-economic forces at play in the aluminium industry”.
And it’s an important point. The problem is not created by the LME warehouse system; it stems from something far broader.
While the global economic picture remains as it is, it is very difficult to see the aluminium finance trade diminish in any way.
There is excess production that finds a comfortable – and profitable – home in the LME warehouse queues.
Of course, producers could quickly cut production but, in the current world, there will be new, lower-cost production to replace it. The real culprits – if culprits is the right word – are the governments who persist in their respective money-creation policies without ensuring that the money they create is used to generate productive economic growth, rather than sitting in an LME warehouse.
The LME is correct to try and protect the other metals as far as it can; it is also correct that the problem in aluminium comes from factors outside the exchange’s control.
Lord Copper editorial@metalbulletin.com