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Warehouse incentives fall after LME action

Keywords: Tags  warehouse, LME, London Metal Exchange, Detroit, aluminum, zinc


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 bourse’s proposals to cut back the queues that have developed there, market sources told AMM sister publication Metal Bulletin.

The incentive to bring aluminum into Metro International Trade Services LLC’s warehouses in Detroit is believed to be about $195, down about $30 since the LME’s 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, sources said.

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 Detroit—where the majority of LME aluminum is stored—and New Orleans, which has become a stronghold for zinc.

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 factors—having to compete with warehouses for metal and not being able to use the LME as a source of supply—have 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 factors.

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 nine months.
Over time the new rules could bring aluminum and zinc premiums back below $100, Macquarie Group Ltd. said in a note to clients July 2.

“$50 per tonne won’t be the level tomorrow, but it’ll be very tough to sustain the values where they are now. They will fall over time. They can’t go any higher. The security of the warehouses has just gone,” a physical aluminum trader said. “The floor is definitely lowering.”

Nems and Pacorini declined to comment on the LME’s new proposals. Metro was not immediately available for comment.

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