NEW YORK The London Metal Exchange implemented a number of rule changes for its warehousing system in April, and additional revisions could further alleviate backlogs for metal-thin consumers, said Macquarie Capital Securities Ltd. analyst Duncan Hobbs.
More than 5.4 million tonnes of aluminum is currently stored in LME-approved warehouses around the world, but due to long wait times at a number of critical locations it can take years to retrieve. In response to consumer concerns about metal availability, the LME on April 1 boosted minimum load-out rates for warehouses holding at least 30,000 tonnes of a single "dominant" metal (amm.com, Nov. 15), but with wait times still in months or even years at some locations, buyers are unable to turn to the warehouses to meet their supply needs.
As a result, spot premiums have soared to near-record highs. "One of the impacts of all this is a substantial rise in premiums," Hobbs said in a presentation at AMMs Aluminum Summit in New York. "The LME price has fallen but premiums have doubled."
The LME aluminum cash price settled at $1,748.50 per tonne June 20, down 3.6 percent from $1,813 per tonne a week earlier, while AMMs Midwest aluminum premium is in a range of 11.6 to 12 cents per pound (amm.com, June 20).
However, there are a number of ways the LME could level the field for consumers in need of aluminum, Hobbs said. First and foremost, the LME could introduce more transparency so market participants understand what is happening in the warehouses. The LME also could link load-out ratescurrently between 1,500 and 3,000 tonnes per day depending on the volume of materialto the number of warehousing units at a specific location rather than to each individual warehouse company; implement different load-out rates for different modes of transportation; and prohibit warehouses deemed to have too much from receiving deliveries or cap the amount of metal any one company can hold in a location.
Reducing the rent while metal is waiting to leave the warehouse would help curb the incentive to hold on to it longer for more money, Hobbs said, while separate queues for different metals would allow consumers of other metals trapped in the queue because of large aluminum stocks to get material sooner.
Any such changes, however, likely would face significant backlash from the warehouses and could have unintended consequences, Hobbs said.