LONDON London Metal Exchange warehouse companies will be required to deliver out more metal than they draw in at storage locations where long load-out queues have developed, under new exchange proposals following a review of its warehousing policy.
The new load-out model, which will be subject to a three-month consultation, will link daily stock inflows and outflows to steadily reduce the queues that have developed to withdraw metal from locations such as Detroit, New Orleans, Antwerp, Johor and Vlissingen.
While the LME has taken action previously to make non-dominant metals that are stored in those locations more readily available to the market, the queues for the dominant metals have increased at some of those ports since its most recent changes came into effect in April, the LME said July 1.
The increasing concentration of LME stocks in those locations also has exacerbated the effects of the queues on the function of warehouses as a market of last resort, as physical users have found less material available in other locations for prompt withdrawal. For example, there were 283,100 tonnes of zinc stored in LME warehouses in Europe on July 1, but only 13,175 tonnes were stored in locations where there are no significant queues to withdraw metal.
Charles Li, chief executive officer of LME owner Hong Kong Exchanges & Clearing Ltd., last year pledged to examine how the queues were affecting the physical market, and take appropriate action.
"Previously, I was quoted as saying I would take a bazooka to the warehouse queue issue if getting access to metal were a big problem. But our assessment is that buyers have access, so we are not facing a fundamental problem with our market and a bazooka is unnecessary," Li said in a blog post accompanying the LME announcement July 1.
Under the new proposals, in cases where it would take 100 calendar days or more to clear the backlog of canceled metal in a given location, warehouse companies will be subject to a calculated cumulative incremental load-out rate on top of their normal obligations until the queue drops below the 100-day threshold
To stop companies from loading up their warehouses before the full introduction of the policy, the LME will immediately record the inflow and outflow of metal in all locations for the next nine months. At the end of that period, any "affected warehouses" with queues of more than 100 calendar days will be required to deliver out over three months a cumulative incremental load-out rate equal to the total net inflow of metal during the nine-month period, the LME said.
Separately, from April 1 the LME will track inflows and outflows over a three-month period to calculate a cumulative incremental load-out rate that will be equal to half of the amount of the new metal placed on warrant, up to 3,000 tonnes, and all of the metal placed on warrant over and above the minimum load-out rate. For example, a warehouse that draws in 3,000 tonnes in one day would be required to deliver out an additional 1,500 tonnes, on top of its normal 3,000-tonne-per-day obligation, the LME said.
The LME said it anticipates certain unintended consequences of the new system, such as a tightening of nearby spreads, as shorts find that warehouses are unwilling to take deliveries and they are forced to roll their positions forward.
The LME board is expected to make a final decision on the policy at a meeting in October.
A version of this article was first published by AMM sister publication Metal Bulletin.