The London Metal Exchange (LME) is set to consult on potential changes to its warehouse storage rules after persistent bottlenecks emerged last year, despite previous reforms aimed at alleviating gridlock. This initiative aims to address ongoing challenges in the storage and delivery of metals, particularly aluminum.
Key Highlights:
Background on Warehouse Issues:
Nearly a decade ago, the LME implemented queue-based rent capping (QBRC) rules to mitigate warehouse congestion. These rules limit rental income for warehouses to 80 days after a notice of intention to take delivery or cancellation of warrants.
Current Challenges:
The QBRC rules have inadvertently led some traders to cancel warrants to avoid storage fees, causing delays for consumers needing timely access to metals. Despite the reforms, queues for delivery have re-emerged, particularly following a large aluminum delivery to ISTIM’s facilities in Port Klang.
Queue Statistics:
In May last year, the wait time for aluminum delivery from ISTIM’s warehouses reached 253 days, dropping to 163 days by the end of the year. Most aluminum in Port Klang originated from India, as Western consumers have largely avoided Russian-produced metal due to geopolitical tensions.
Proposed Alternatives:
Sources indicate that one potential alternative to QBRC could involve imposing percentage-based load-out requirements, mandating warehouses to ensure a certain percentage of their inventory is shipped out within a specified timeframe. This approach aims to enhance efficiency and align with practices in other commodity exchanges, such as COMEX.
Potential Impact of Changes:
Implementing percentage load-out rules could limit the amount of metal stored in warehouses, thereby improving access for consumers and producers. However, this change is likely to face resistance from firms that profit from storing large quantities of metal.
Additional Regulatory Considerations:
The LME is also expected to consider banning “rent deals,” which allow warehouses to share rental income with metal delivery companies. This practice has raised concerns about conflicts of interest and transparency in warehouse operations.
Future Directions:
The LME has stated that it maintains a comprehensive set of rules regarding queues and is committed to reviewing its warehousing regulations to ensure they meet the needs of the market.