Nov. 13, 2013
LME Introduces Warehouse Reforms
The board of the London Metal Exchange has approved proposed changes to its warehousing policy designed to cut queues at warehouses, following a three-month consultation with the global metals industry. The changes will take effect April 1, 2014.
“As the world's leading base metals exchange, the LME has a duty to the entire metals community to run a fair and orderly market. We had a responsibility to examine concerns raised about lengthy warehousing queues, as these pose a range of issues in terms of price discovery and price convergence as well as the use of the market for effective hedging,” says Garry Jones, chief executive of the LME.
Some modifications have been made to the proposal in accordance with market feedback. The initial proposal targeted warehouses with queues of more than 100 days, but as a result of the consultation the threshold has been reduced to 50 days, allowing the LME to better deliver a market of last resort to physical metals users.
The proposal operates by measuring all of the metal loaded into a warehouse over a three-month period. If there is a queue of more than 50 calendar days, the affected warehouse would be expected to deliver out additional metal based on a formula. A warehouse currently required to deliver out daily shipments of 3,000 tons would, under the proposal, need to load out at least 1,500 tons per day more than it loads in.
The LME has also agreed to further enhance the existing physical network in a number of ways. The exchange will commission a full external logistical review of LME warehousing to address issues raised regarding reasonable operational expectations and requirements, and also to review its warehousing agreement.
In addition, the LME will create a new Physical Market Committee to provide the physical community with enhanced representation in the LME’s governance structures. The LME’s warehousing system will continue to be reviewed every six months, and the new committee will play a substantial role in this process. The LME also plans to investigate the viability of introducing products linked to premium price discovery and hedging, although such products are seen as complementary to the new policy targeting queues.
While the implementation of certain aspects of the new rules will require further discussion with warehouse companies, the LME does not expect this to delay implementation as planned on April 1.
Aluminum giant Alcoa, which had several concerns with the LME’s initial proposals, released a statement supporting the LME's steps to create “a more transparent marketplace.” Alcoa supports the LME’s intention to examine creating premium contracts, which Alcoa recommended in its response to the LME's proposed warehouse rule changes. Premium contracts would provide market participants the ability to hedge exposure to the all-in price, the New York-based company claims.
Alcoa also encourages the LME to focus on increasing confidence among market participants through greater transparency and premium contracts, and cautions against direct market intervention. “We are further encouraged by the LME's intention to closely monitor the consequences of its newly adopted rules,” according to the Alcoa statement.