Hong Kong Buyer to Solve Metal Delivery Issues at LME

June 18, 2012 at 17:42

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The prospective buyer of the London Metal Exchange has warned that it will clamp down on the lucrative metal warehousing business that has attracted investments from Goldman Sachs and Glencore.

Hong Kong Exchanges & Clearing, which on Friday announced an agreement to buy the 135-year-old group for L1.4 billion, said it was planning to change the rules governing the LME’s network of warehouses in an attempt to shorten the wait to take delivery of metal.

Long queues to remove aluminium from LME warehouses have sparked angry confrontations between consumers of metal, such as Coca-Cola, PepsiCo, and General Motors, and warehouse owners, including Goldman, JPMorgan, Glencore, and Trafigura.

Banks and trading houses have rushed to buy warehousing companies to profit from the fact that large quantities of metal have become surplus to requirements since the financial crisis. But now that the metal is needed, consumers say, it can take more than a year to be delivered.

The problem is most acute at warehouses owned by Glencore in the Netherlands and Goldman in Detroit. The premium to buy a cargo of aluminium for immediate delivery has soared to record highs as a result, in spite of large stocks, consumers say.
Charles Li, chief executive of HKEx, told the Financial Times that warehousing was a “very challenging issue.” The LME’s responses to date — which include increasing the rate at which the largest warehouses must deliver metal — “generally speaking fit the problem,” he said.

Martin Abbott, chief executive of the LME, has in the past attributed the problem to logistical challenges in removing metal from warehouses and low interest rates that make it easy to finance inventories.

“It is no longer just a simple logistic challenge issue. … There are behaviour issues. We need to look at the rules, what behaviour they encourage and what behaviour they discourage,” Mr Li said. In a later statement clarifying his views, he added: “Our position is no different from the current LME position.”

HKEx’s bid must still pass a vote of the LME’s shareholders, of which the largest are JPMorgan and Goldman Sachs.

Warehouse companies earn a fee while they hold metal, even if it has not left because of queues. Consumers and some traders have complained that because queues guarantee a future revenue stream, producers are being persuaded to store their metal.

“As long as warehouses continue to offer incentives to attract metal that is guaranteed to stay in storage for prolonged periods, less metal is available for actual usage,” said Nick Madden, chief procurement officer at Novelis, the top buyer of aluminium.

The LME said: “We are constantly monitoring the way that LME warehousing functions and will take action when appropriate.”

Simon Collins, head of dry bulk commodities at Trafigura, the second-largest metals trader, said: “We would welcome a review by HKEx of LME rules on warehousing and delivery.”

The dispute, along with a disagreement about raising trading fees, has caused many LME shareholders to lose faith in its management structure. Half the board is made up of banks and brokers, including Goldman.

Numerous investors say concerns about governance are one reason LME shareholders are likely to vote for a sale.