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Issues&Positions

Position Paper on LME Warehousing Mechanism

Position Paper on LME Warehousing Mechanism

In June 2012, the London Metal Exchange (LME) announced to scrutinise its warehousing procedures after complaints of large clients about too long metal delivery times. Since LME welcomed industry comments and suggestions to improve metal delivery practices, EUROFER, representing European steel industry which is one of largest purchasers of zinc, tin and other metals worldwide[1], would like to share its views on this topic with LME.

The LME warehousing system was initially designed to provide flexibility in supply of metals to the physical market as ‘last resort’ solution: industry can use the LME’s delivery option to place excess stock in times of oversupply and as a source of supply in times of extreme shortage. In reality, market participants use more and more the LME predominantly for financing purposes; as a result, investors (banks and/or trading houses) play a significant role in metals market.

The LME rules applied to affiliate warehouses pose serious concerns about the real availability of metals:

  • Metals are stored in facilities owned for instance by Glencore (Pacorini) or Goldman (Metro) who have interest to keep metals within the warehouses as long as possible.
  • The daily loading-out rate fixed at 3.000 tonnes by location by warehousing company (for warehouses having more than 900 000 tonnes of metals) for all out-going commodities is not sufficient to satisfy actual demand requirements from consumers and to guarantee timely delivery.
  • High load-out requests for aluminium in many warehouses result in extremely long delays of other metals such as zinc (300 – 400 days for having the material destocked). Meanwhile, the concentration of specific metals such as zinc (see figure 1) in a limited number of warehouses exacerbate these effects.
  • Loading-out rules, geographic location of metals stocks and concentration in the ownership of the warehouses adversely influence the LME warehousing system; e.g., from August 2011 to November 2012, the number of warehouses rose by 20 (from 21 to 42) in Vlissingen of which 19 from the same warehousing company Pacorini (see comparison table below – table 1.) not producing any appreciable improvement of the situation.

While global zinc production is higher than actual demand, LME rules create an artificial shortage for physical consumers, allowing metal producers to increase premiums for fulfilling actual consumption.

 

 

No. of warehouses by location

No. of warehousing company

 

2011 Aug

2012 Nov

Evolution (No.)

Evolution (%)

 

 

 

2011 Aug

2012 Nov

Evolution (No.)

Evolution (%)

New Orleans

39

58

19

49%

Pacorini

20

28

5

5

0

0%

Metro

17

22

Detroit

25

37

12

48%

Pacorini

2

2

3

3

0

0%

Metro

20

29

Vlissingen

21

42

21

100%

Pacorini

21

40

1

3

2

200%

Antwerp

32

57

25

78%

Pacorini

2

2

8

9

1

13%

Table 1. Evolution of warehouses numbers

 

Figure 1. Distribution of LME Zinc stock in October 2012 (source: ILZGS)

 

EUROFER believes that current LME warehousing load-out rates prevent metal markets from reaching the necessary balance between supply and demand. They are supporting producers and investors who are not physically involved in the metals business while negatively impacting metal customers as they are unable to get physical material from LME warehouses.

The European steel industry and, in general, the European Economic Area (EEA) are in deficit of zinc (see figure 2) and consequently prone to paying higher premiums for metal commodities, especially zinc.

 

Figure 2. Supply and Demand in the EU27 EEA (source: CRU and ILZSG)

EUROFER strongly believe that LME warehousing load-out rates is preventing natural market principals of demand and Supply and are helping small category of actors in creating artificial shortage of material while negatively impacting a whole range of consumers in the downstream processing chain as premiums for physical deliveries are sharply increasing in the market.

EUROFER and its members would suggest that LME scrutinises its warehousing rules concerning loading-out rates in order to significantly shorten metal delivery times. This would result in the market for metals such as zinc finding a balance which sufficiently reflects global demand and supply fundamentals to the benefit of final consumers. To this extent, the operational efficiency of warehouses would be significantly improved by:

  • fixing separate load-out rates for each type of metal (not only for Sn and Ni, but also for Zn and Al);
  • releasing the constraint of load-out rates by warehousing company and implement load-out rates by warehouse.


[1]European steel industries buy very large quantities of metals for their applications like galvanization, alloying of non-ferrous metals for special steels production and surface treatment for special applications.

EUROFER - The European Steel Association

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B-1000 Brussels

Tel.: +32 2 738 79 20
Fax.: +32 2 738 79 55