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Analysts, market react to LME’s warehouse policy

Keywords: Tags  London Metal Exchange, LME, warehousing policy, aluminum, Robin Bhar, Societe Generale, Casper Burgering, ABN Amro Bank Trafigura Beheer

LONDON — The London Metal Exchange’s warehousing regulation changes won’t have a major effect on the availability of aluminum to consumers, Robin Bhar, head of metals research at Société Générale SA, said.

Bhar argued that financing deals are still likely to continue to reduce the availability of metal, as there has been little change in the current low interest rate environment.

"On physical (aluminum) premiums, these should now be capped and a further moderate fall can be expected, which we believe will be offset by higher spot prices," he said.

Aluminum premiums fell after the LME’s initial announcement July 1 that it was proposing to link load-out rates to the length of queues, although they have recently firmed again and moved slightly higher.

Spot prices will rise as stock financiers remove metal from LME warehouses, bound for cheaper, private storage, which could lead to a decrease in market transparency, Bhar told AMM sister publication Metal Bulletin.

"(This means) the realized price—the spot (aluminum) price plus a premium—remains largely unchanged, in our view," he said.

The proposed changes to the warehousing policy were aimed at reducing the amount of time users must wait to gain access to metal, Bhar said, but added these users aren’t likely to be consumers. "(Rather, it will be) banks, trading houses, investors, etc., representing financial users involved in the cash-and-carry trade," he said.

Casper Burgering, senior economist in industry and industrial metals at Amsterdam, Netherlands-based ABN Amro Bank BV, said he believes at least some stakeholders will derive benefits from the new rules, while others will be disappointed.

"But it is certainly not all doom and gloom. In the long run, this new rule will create a more balanced market in my opinion," he said. "Producer discipline has been limited so far in oversupplied metal markets. Capacity has to be cut eventually in order to bring the balance back into markets."

Burgering disagreed with Bhar on the impact of the new rules on consumers, however, saying they are likely to applaud the new rules. "It will result in a more orderly functioning metal market, with more material being more easily accessible at lower costs," he said.

Burgering agreed, however, that there is likely to be a further fall in aluminum premiums. "However, premiums will fall, and with current spot prices nearby production costs—for the high-cost metal producers—more producers will face increasing financial challenges," he said.

Eventually, high-cost metal producers will be driven out of the market, Burgering said, and this will reduce the availability of material.

Furthermore, it is likely that under the new rules LME stocks will be moved between warehouses, LME-listed and otherwise, which could have an effect on the ease with which inventory levels might be measured, he said.

"The shift between LME warehouses will result in more equal distribution, but material will also be delivered to other warehouses, which will be more difficult to register," Burgering said. "If this is the case, we will have no clear vision on the exact inventory levels, making our jobs as analysts more difficult."

On the other hand, Simon Collins, head of nonferrous and bulk commodities at Amsterdam-based Trafigura Beheer BV, said his company welcomes the new measures.

"We were glad to have the chance to submit our views as part of the consultation process, and are delighted to see that the LME board has gone further than its original proposals against the background of an often polarized debate," he said. "These decisions will make a strong and sustained contribution to the smooth running of the LME system once they come into force."

Meanwhile, the physical aluminum market has said it needs time to digest the changes to LME warehousing regulations before it can react.

"I have no immediate comment on the rules, but it seems to be in line with what the market expected," a trader said.

The market also remains undecided on the potential benefits of reducing the queue limit to 50 days.

"It is too soon to discuss (the impact) of the 50-day rule. We will need time to review the whole LME (statement) before we can make a comment," a producer said.

"There’s nothing to report. We need time to digest the plans first," a second trader said.

One trader said, however, that he believes the move to a 50-day queue requirement won’t have much immediate impact on the market.

"To me, what looks very important is that the change has now been confirmed," he said.

A version of this article was first published in AMM sister publication Metal Bulletin.

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