LONDON London Metal Exchange warehouse companies are
cutting the incentives they will pay to attract metal into
registered locations such as Detroit in response to the
bourses proposals to cut back the queues that have
developed there, market sources told AMM
publication Metal Bulletin
The incentive to bring aluminum into Metro International Trade
Services LLCs warehouses in Detroit is believed to be
about $195, down about $30 since the LMEs surprise
announcement July 1 (
amm.com, July 1
) , market observers said.
Pacorini Vlissingen BV, which is believed to have backlogged
sheds in Vlissingen, the Netherlands; New Orleans; and Johor,
and Nems Ltd., the dominant player in Antwerp, are also
recalculating the incentives they will pay to take in metal,
From next year, the LME will require warehouse companies to
deliver out more metal than they load in at locations where the
queue to withdraw metal is 100 days or more.
Based on the length of the current load-out queues, the
locations most affected by the change will be Vlissingen and
Detroitwhere the majority of LME aluminum is
storedand New Orleans, which has become a stronghold for
The queues lie at the heart of the sustained controversy
surrounding LME warehousing. Because of the queues, warehouses
have been able to offer market-beating incentives to attract
metal into storage, forcing consumers to compete with those
incentives to encourage a producer to deliver to their yard
instead of a warehouse.
They have always been able to get metal from producers if they
need it, as long as they were willing to pay.
At the same time, for end-users and traders trying to buy from
the LME, the queues have caused an increasingly acute shortage
in free-float metal available for immediate withdrawal in
warehouses across the globe, as LME inventory has gravitated
toward the back of those queues.
The combination of those factorshaving to compete with
warehouses for metal and not being able to use the LME as a
source of supplyhave caused physical consumers to
bristle, and encouraged them to call on the LME to take action.
By targeting the queues, the LME is addressing both of those
While it could take months or even years for the longest queues
in Vlissingen and Detroit to dissipate under the new model,
there were signals July 3 that warehouses are already reducing
the incentives they will pay to bring metal into logjammed
locations, after factoring in the likelihood that they will be
obligated to load out at a faster rate from April 2014.
To prevent warehouses from loading up their warehouses ahead of
April, the LME will, once the rules come into effect, also
force warehouses to deliver out over three months any net
increase in stocks that occurs at those locations over the next
Over time the new rules could bring aluminum and zinc premiums
back below $100, Macquarie Group Ltd. said in a note to clients
$50 per tonne wont be the level tomorrow, but
itll be very tough to sustain the values where they are
now. They will fall over time. They cant go any higher.
The security of the warehouses has just gone, a physical
aluminum trader said. The floor is definitely
Nems and Pacorini declined to comment on the LMEs new
proposals. Metro was not immediately available for comment.