Oct. 4 (Bloomberg) -- The London Metal Exchange will study ways to alleviate a backlog of industrial metals alongside aluminum that’s building at warehouses and taking longer for customers to retrieve.
The LME in July said it would double the amount of metal required to be delivered from the biggest stocks from April to ease a backlog. Warehouse line-ups are a “symptom of a market condition” and the bourse’s measures won’t make them go away, LME Chief Executive Officer Martin Abbott said at a dinner in London today, according to an e-mailed copy of his speech.
“While this issue is centered on aluminum, there are other metals caught in the queues, and we have undertaken to study ways in which that situation can be alleviated,” Abbott said at the dinner. “There is no simple answer, but we are working on it.”
The new rules on so-called load-out rates may help to remove metal faster from warehouses holding the biggest stockpiles. Withdrawing metal from warehouses in Detroit can take as long as seven months, Laredo, Texas-based researcher Harbor Intelligence estimated in July. LME-monitored warehouses contain 6.7 million metric tons of metal, exchange data show.
Abbott was speaking at the annual LME Week dinner as the 134-year old bourse that handles 80 percent of global trade in metals faces a possible takeover.
The load-out rate will increase to a daily minimum of 3,000 tons for a warehouse company storing more than 900,000 tons at a single location, under the new rules. That falls short of the 1,500 tons per 300,000 tons of stock recommended by Europe Economics, which the LME commissioned to study the issue.
Metal has been backing up because financing deals have become a more significant factor in the market in part due to low interest rates, Abbott said. Societe Generale SA has estimated that as much as 70 percent of aluminum inventory may be tied up in financing arrangements.
“Those queues are not the result of a broken warehouse system, they are in fact the result of an extraordinary macro- economic situation,” Abbott said at the dinner. Raising load- out rates even higher may exacerbate the situation and “could have the perverse effect of making the finance deals even bigger, because faster access to the metal would make deals more profitable.”
--Editors: Claudia Carpenter, Dan Weeks
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