LME acts on warehousing concerns

New ruling attempts to ease delivery queues and sky-high premiums

Industrial metal users have long complained about the length of time they have had to wait for deliveries of aluminium from London Metal Exchange (LME) listed warehouses, but it is hoped a new ruling will help ease these queues.

Complaints of the warehousing system have been registered by the likes of MillerCoors, Coca-Cola and Novelis who have all criticised the low-rate at which storage facilities have shipped out the metal. This, they said, was not only pushing up the premiums they had to pay over and above the cost of the metal itself, but artificially limiting the availability of supply at a time when an abundance of the metal existed.

Accusations were labelled at the owners of these warehouses – JPMorgan, Goldman Sachs, Glencore and Trafigura – that they were simply profiteering at the expense of both customers and consumers, by charging rent for that metal which was stuck in a long queue.

These warehouses charged customers around 41 US cents per tonne, per day for storage of the metal. The queues at some of these locations stretched to 19 months and so costs mounted quickly.

Owners of the warehouses said they were simply working within the rules which stipulated that they had to load-out 1,500 tonnes of the metal per day, but crucially, could take in as much as they could handle. As the global economy improved and pushed up demand, which saw queues lengthen, premiums rise and tempers flare.

Consultations and investigations into the issue were carried out and revealed that in 2012 businesses had had to pay around $3bn more than they had previously.

In an attempt to ease the congestion the LME proposed in 2011 that those warehouses holding more than 900,000 tonnes of the metal would have to increase output to 3,000 tonnes per day from April 2012. This was met with disapproval from many who said that load-out rates should be much higher and implemented immediately.

The LME continued the search for a solution and in November 2013 announced a package of reforms that will oblige warehouses with queues of over 50 days to ship out at least 1,500 tonnes more than they take in.

Speaking to Procurement Leaders about the changes Nick Madden, senior vice president and chief supply chain officer at Novelis said, “In my view any kind of queue is unacceptable, but saying that, the new 50-day ruling is a step in the right direction.

“It’s going to take a long time for this to be effective, but you can’t expect an overnight change and the situation will improve.”

He said that he was confident the new ruling would make warehouses less inclined to offer the incentives they had done in the past to hold on to the metal and that the LME would act against those that didn’t conform.

As for what will happen to premium’s Madden told the Novelis company blog that they should return to normal levels. However, he added that supply chain risk will remain if those owners of the metal decide to withdrawn this stock from LME registered warehouses and shift it to non-LME warehouses, which would push stocks below the radar and make the market less transparent.

Depending largely on what Chinese smelters decide to do, this could also result in a cut in output.

“These high premiums kept a lot of smelters going so if they do fall we may see some capacity cut, but Chinese producers continue to come into the market,” says Madden.

But with healthy stockpiles, the potential for a decrease in premiums as well as rising load-out rates, the New Year will be something that aluminium buyers can look forward to rather than fear.

from Procurement Leaders Blog http://www.procurementleaders.com/blog/my-blog--tim-burt/lme-acts-on-warehousing-concerns

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