FORT LAUDERDALE, Fla.
Changes to London Metal Exchange warehouse rules may
have the unintended consequence of driving millions of tonnes
of aluminum out of exchange-listed sheds and into "invisible"
stocks, according to industry observers.
Such a trend means
more transparency is needed in the aluminum market, some said,
with one analyst calling for reporting requirements in
commodities similar to those already in place for equities
under U.S. Securities and Exchange Commission (SEC) rules.
critical to price discovery," said Lloyd OCarroll,
principal of the OCarroll Aluminum Bulletin.
"Wouldnt it be nice if we actually knew who the warrant
the comments Jan. 13 during a panel discussion at the Platts
Aluminum Symposium in Fort Lauderdale, Fla.
Other information that
should be disclosed includes the identity of those canceling
warrants as well as the destination of metal being loaded out
of LME-listed warehouses, OCarroll said. The SEC requires
investors over a certain size to report their holdings every
quarter, something commodities exchanges should consider, he
Canceled warrants, for
example, were historically a good indicator of physical demand
but have lost that status in a "warehouse-financing world,"
OCarroll said. Canceling a warrant is now "strictly a way
to cut your cost of storage by moving into your own warehouse
or moving off warrant sometimes in the same physical
warehouse," he said, noting that "only a very small portion" of
canceled warrants represent metal earmarked for actual
Almost all warrant
holders are financiers, OCarroll said. "Once theyve
sold it forward and financed it, the only way to improve their
return is to cut rental costsso they will continually
seek lower rents through whatever means necessary, especially
if they expect the (LME) warehouses to raise rents," he
Historically, LME rule
changes have led to higher rental rates, OCarroll said.
And off-warrant rates are already only a fraction of LME rental
rates, he added. "This suggests a major outflow of inventory
from the LME system over time."
In the future the only
people left in the LME-listed sheds might be either players
without strong balance sheets who need warrants as collateral
or those who own their own warehouses, OCarroll said,
pegging off-warrant inventories at 4.5 million tonnesa
number that could climb to 6 million to 7 million tonnes in the
next year to two. "But whether the material is on warrant or
off warrant, its not physically available," he said.
Another analyst pegged
off-warrant inventories at even higher levels.
LME inventories are
approximately 5.5 million tonnes, but off-exchange stocks could
be as high as 10 million tonnes, said Joel Spier, principal of
J Spier Consulting LLC. "Most of us can only guess how much
inventory is not being reported," he said.
An unintended impact
of the new LME warehouse rules likely will be to push even more
metal into non-LME-listed sheds, Spier agreed. "The metal is
going to go off warrant."
Matt Chamberlain, head
of business development for the LME, defended the
"Whatever is happening
out there in the market is going to be reflected on the LME,"
Chamberlain said, also touting new load-out rules. "It stands
to reason that if a substantial amount of metal flows into a
warehouse, then it must eventually leave."
But Chamberlain also
cautioned against changing exchange rules too much, such as
forcing sheds to be able to load out their inventories
"overnight." The LME, he noted, served as "a market of last
resort" during the 2008 financial crisis and would not be able
to do that again under such conditions. "We would be in danger
of reforming the LME in a way that meant in the next financial
swingwhich will surely happen at some pointwe would
not have a network that is able to perform that function."