LME changing rules for warehouse

[pmbug]

I thought we had a previous discussion here about the warehousing (delivery) bottleneck occurring (especially with aluminum), but I can't seem to find it right now. Anyway, the news:

The London Metal Exchange (LME) expects proposed changes to its warehousing rules to go some way to solve problems in the network of warehouses it monitors, Chief Executive Martin Abbott said at a news conference on Friday.

The LME proposed on Thursday a rule that warehousing companies that have 30,000 tonnes or more of a single metal in a queue should deliver out as much as an additional 500 tonnes per day of other metals stuck behind it in the queue.

This should alleviate the effect that queues, particularly of aluminium, are having on other metals, the LME said.

The London-based exchange currently allows warehouse operators, including banks and trade houses, to release only a small fraction, up to 3,000 tonnes, of their overall inventories each day.

These rules - along with financing deals that tie up stocks for years and concentrate them in warehouses where rent is cheap - have caused long queues for delivery of metal to consumers and an artificial tightness in immediate supply that pushes up costs.

In some warehouses, outward deliveries of a number of metals are being delayed by an inventory glut in aluminium, which would be described as the dominant metal.

"If 500 tonnes doesn't work, we will review it, but we expect it to work," Abbott said. If adopted, the proposal would come into effect from April 1 next year.

Analysts and traders said the move would not solve the problem of long queues but is nevertheless welcome.
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More: http://www.mineweb.com/mineweb/cont...g-finance-investment-old?oid=162677&sn=Detail

 

[ancona]

I think the rules are patently absurd on their face. If I purchase a thousand tons of aluminum, and i provide the trucks to pick up my metals, what the hell is keeping me from doing that? I'll tell you what; JP Morgan et. al., that's what. JPM owns huge stocks of metals that they have bought up from producers so they can hold it off of the market to control the price. It's a nice gig if you can get it, since they pay a significantly lower price to producers for ingots of finished metal than you or I can pay, then hold on to it and dribble it on the market at inflated prices. What I read is that they make as much as 50% mark-up as a result of these "bottle-necks" that are artificially created.

The release limits were initially put in to place to control metals and keep them from flooding the market all at once, depressing prices, but the reverse is happening now.

 

[pmbug]

Proposals by the London Metal Exchange to improve warehouse withdrawal times could have several implications for the base metals markets, with curbing physical premiums one of the most visible.

Earlier this month the LME, the world’s largest metals exchange, laid out a plan to improve delivery of stored metal from its network of warehouses. Metals users have complained for a few years now about waiting times to access stored metal, as some waits exceed 100 calendar days. Users said the delay in deliveries have pushed up premiums, particularly for metals like aluminum and copper.

Among the proposals are that warehouses must ship out more metal than they take in, based on a formula, the LME said in its proposal. The exchange is meeting with market participants now through Sept. 30 and the LME’s board of directors will discuss the plan in October. If approved, the new plan would be effective as of April 1.

The LME has a network of 765 warehouses, but several are heavily backlogged in moving out metal, particularly aluminum, analysts said. For instance, the line to move aluminum out of the LME warehouse in Vlissingen, Netherlands, is 365 days.

...

The new proposal would also affect time spreads, Barclays analysts said. Time spreads are when an investor simultaneously enters a long (buy) and short (sell) position in the same commodity, but during different delivery months. Time spreads are sometimes called calendar spreads.

“Investors with short futures positions may find it more difficult to physically deliver against their position if warehouses in the location where they hold metal refuse to take delivery. This could lead to exaggerated backwardations, as short positions may have to be rolled forward or closed out using futures,” Barclays said.
...

http://www.kitco.com/news/2013-07-1...anges-Likely-to-Affect-Physical-Premiums.html

 

[pmbug]

JPMorgan Chase and Goldman Sachs are seeking to sell their metal warehousing units just three years after their controversial entry to the industry, even as a proposed rule change by the London Metal Exchange is likely to reduce the attractiveness of the business.

The two US banks got in to the niche warehousing business in 2010 at a time when a build-up in stocks following the financial crisis had triggered a boom for storage companies. But their ownership of warehouses struck a nerve when metal users began complaining that warehousing companies were profiting from bottlenecks in the system that have distorted prices.

Both banks have informally started sounding out buyers for their warehousing subsidiaries in recent months, people familiar with the matter told the Financial Times. ...

The planned sales also coincide with a new LME rule proposed this month that could cut in to a major source of profits for the warehousing industry.

"The LME has cratered the valuations of these companies," said one rival trading house executive.

The LME's proposed rule change takes aim at bottlenecks that slow the delivery of metal out of their sheds.

When warehouses are full, as they are now, long queues develop to move metal from one location to another. The delays have been profitable for warehouse owners because they continue to receive rent until metal actually leaves. They have tended to use the stream of revenue from the queues to offer incentives that attract more metal and maintain large stocks at just a few locations.

But the LME's new rule would prevent this practice, in effect forcing stocks at the most dominant warehouses to be drawn down and cutting into the rent paid. Other warehouse owners with large LME stockpiles, including traders Glencore and Trafigura, would also be affected.

The proposal, which is open to consultation until September, marks a step forward in the LME's effort to address the warehousing situation following its acquisition by Hong Kong Exchanges & Clearing in December. Before that, the LME was owned by banks and brokers, with JPMorgan and Goldman as the two largest shareholders.
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More: http://www.gata.org/node/12789

Well, I guess that explains the Chinese interest in the LME.

 

[pmbug]

The London Metal Exchange, aiming to appease critics of its global storage network, on Thursday slashed queues for metal, beefed up its powers to act against market abuse and will review its agreement with warehouse owners.

The world's largest and oldest metals marketplace is under intense regulatory and legal pressure over its storage system, with complaints about queues of more than a year and large surcharges to withdraw material from its warehouses.

The crisis has drawn scrutiny from British and U.S. regulators and complaints from industrial users, including beer and can maker MillerCoors LLC and Novelis, which manufactures sheet used to make drinks cans.

The LME proposed new rules in July to overhaul its delivery system from next April that would force warehouses to release more stocks once the wait time breaches 100 days.

Its new plan has cut that to 50 days and the LME said it would keep that figure "under active review".

The exchange also said it had given itself the power to act swiftly to prevent abuses of the system and it will have the authority to probe whether warehouses are manipulating flows of metal to create backlogs.
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More: http://www.reuters.com/article/2013/11/07/lme-warehouses-idUSL5N0IS27D20131107

 

[pmbug]

Russian aluminium producer Rusal dealt a stunning setback to London Metal Exchange plans to cut logjams in warehouses, winning a court decision to halt the reform because consultations had been "unfair and unlawful".

The High Court in London ruled in favour of Rusal which fears prices of its products will suffer from the LME's efforts, which had been due to take effect on April 1, to make owners of warehouses in the exchange's global network deliver metal more quickly to consumers.

"The LME is disappointed with the outcome of the judicial review," said the exchange, the world's biggest marketplace for industrial metals, adding the new rule would not be implemented as scheduled.

It said it was taking legal advice on its options, including launching an appeal or restarting the consultation.
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More: http://www.mineweb.com/mineweb/cont...g-finance-investment-old?oid=234866&sn=Detail

 

[ancona]

I don't see why producers of metal products don't simply take delivery of raw aluminum ingot directly from the smelters. It would seem that folks like Budweiser and Coke should have quite enough leverage [money] to make that happen. In fact, the smelter would no longer be beholden to pay a vig to the middle.

P.S. I apologize for trying to suggest something sensible. [sarc]

 

[mmerlinn]

LME stocks of aluminum are horrendously high and have been for six years. Before 2008, normal LME aluminum stocks hovered around 1mm tons. For the last six years, LME aluminum stocks have fluctuated around 4.5mm to 5mm tons.

The net effect of the logjam in the LME is that producers have no incentive to cut production, thereby keeping stocks high and aluminum prices low.

For over 20 years before 2008 iron and aluminum prices hovered around a 20:1 ratio. Since 2008 and the run up of LME aluminum stocks, the ratio has typically been around 5:1.

That has been a total disaster for me. For decades I used to pay double iron prices for transmissions, dismantle them, then sell the scrap for triple what I paid. Today, if I pay double iron prices, the separated scrap sells for 18% LESS than what I paid. If I try to match shredder prices (TRIPLE iron price), I would be selling the scrap for 44% LESS than what I paid. So, today, it is physically impossible to buy scrap transmissions from wrecking yards and turn a profit.

Before the ratio went wacko, the local car shredders would only pay double iron price for transmissions delivered to the shredders, or just iron price if they put a drop box in the wrecking yards. The shredders were not viable competitors to me at all. Today with the wacky ratio, the shredders are paying TRIPLE iron price in the wrecking yards and more when delivered. Imagine how much money I would lose if I tried to compete with them now.

Needless to say, the LME logjam has destroyed most transmission scrappers. The only ones who have survived, like me, have been those who rat-holed tons of cheap common parts while everyone else was dumping their parts for the high scrap prices. Today, those cheap parts are ridiculously expensive because they are now extremely rare. For example, common parts that I sold for $5 each in 2007 now bring $25 to $200 each because they are so rare today.

For decades I used to process 150 to 200 transmissions per week. Today, if I am lucky, I will process MAYBE 10 per week. Since I must pay extreme prices today, I am very selective in what I will buy because I know that unless I can sell enough parts to triple my money, I am just wasting my time. So, today, I play the guessing game in trying to guess what will sell in a reasonable time whereas in the past I was guaranteed a profit on every transmission even if I never sold a part.

For me this reality will never change. I simply won't live long enough to see normal ratios again. And until the logjam at the LME is broken (yes, a severe crash in aluminum prices), the aluminum producers will not cut back production.

The nightmare of low prices is probably what prompted Rusal to head to court. Now that the court has ruled, there is no hope for a return to reasonable aluminum prices vis-a-vis iron, copper, lead, and other metals.

In general all base metals, EXCEPT aluminum, have gone up 400% to 500% since January 1998. Aluminum has stayed at exactly the same nominal price as it was in January 1998. Factoring in inflation, aluminum has LOST VALUE, while the other metals have galloped upwards faster than inflation.

 

[ancona]

So you are a scrapper/salvage yard owner? That is pretty close to what we do in the industrial demolition field. It can be a lot of fun.

 

[mmerlinn]

So you ar43e a scrapper/salvage yard owner?

Yes, and no. I don't touch vehicles - too much red tape and competition. I do ONLY transmissions and transfer cases, nothing else. Today I could not be called a scrapper because my main business is selling parts with scrap as a MINOR side issue. Used to be that scrap was 90% of my income, but today I doubt that it is 5%. And I never expect to see that change.

Worst part is that historically if I needed money, I would head to the nearest wrecking yard, buy a load of transmissions, and flip the scrap in a day or so at a profit. Today if I need money, I am screwed as there is no quick way to generate cash without having a fire sale. And fire sales are ALWAYS money losers. Invariably whatever was sold at the fire sale is something that would have sold the next day at 10 times the fire sale price. Been there, done that more times than I want to count.

One time back in the early-80s I needed a truck payment ($525, a LOT of money then) that same day and I only had about $200 total to my name. I went looking for transmissions, but found a box of aluminum heads instead. Paid for them, loaded them, drove 30 miles, flipped them for $1200, came back to town, and took my payment to the truck dealer. Then took the rest of the money and spent it on transmissions which I flipped as scrap three days later for about $1800. With the wacky ratio, that is simply not possible today.

Yup, can be fun, and has been fun for decades, but not much fun any more. Being forced to wait for someone to buy my products keeps me constantly scrambling to keep ahead of the bills. I liked it much better when I could take the bull by the horns and not need to wait for someone to part with their cash.

In other words, I liked it much better when my customers (scrap yards) were ALWAYS willing to part with their money rather than waiting for customers (general public) to need something I have badly enough for them to WANT to part with their money. Guaranteed cash flow versus spotty cash flow.

 

[rblong2us]

The nightmare of low prices is probably what prompted Rusal to head to court. Now that the court has ruled, there is no hope for a return to reasonable aluminum prices vis-a-vis iron, copper, lead, and other metals.

.

http://www.zerohedge.com/news/2014-...t-aluminum-company-rusal-warns-it-may-default

so many levels to the game of money and power ....

 

[mmerlinn]

and that it has asked its creditors to delay repayment on a maturity from its $10 billion debt pile due next month.

http://www.zerohedge.com/news/2014-03-28/first-russian-casuality-worlds-largest-aluminum-company-rusal-warns-it-may-default


This is why I believe that a business is not viable UNLESS it can SELF-finance itself. If the business is run so poorly that it can't pay its bills without outside help, how in hell will it be able to pay its bills if outsiders get involved?

Credit is a DISEASE - You won't catch it here!

 

[pmbug]

A judge has dismissed London Metal Exchange Ltd as a defendant from U.S. antitrust litigation accusing banks and commodity companies of conspiring to drive up aluminum prices by restricting supply, hurting manufacturers and purchasers.
...
The decision does not affect other defendants in the case, which include the large mining company Glencore Plc, Goldman Sachs Group Inc, JPMorgan Chase & Co, and various commodity trading, metals mining and metals warehousing companies.
...

http://www.reuters.com/article/2014/08/26/us-aluminum-lawsuits-idUSKBN0GQ1LM20140826

 

[rblong2us]

Copper prices are surging this morning (in the face of Goldman's recent warnings of a plunge), jumping 4 handles apparently on the heels of a WSJ story in which LME admits that a single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices. What is more remarkable is, as WSJ reports, on several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses. Though no confirmation has been given traders suggest the firm cornering the copper market is Red Kite Group, a London hedge-fund manager that focuses on metals trading.

http://www.zerohedge.com/news/2014-...ysterious-london-buyer-has-cornered-90-market

 

[pmbug]

That's just ridiculous. Is the demand for copper so bad that one entity can buy up 90% of the warehoused supply? Boggles the mind.

 

[rblong2us]

its within the 'rules' apparently

so when will an entity do it for some of the more interesting metals ?

 

[ancona]

When I read about things like this, and hear about JPM and their aluminum shenanigans, I am reminded of just how insignificant we have become in the eyes of The Brotherhood of Darkness. Each time a new and ever more ridiculous "fee" is added to my bank statement or phone bill, I am reminded that I am but a mere prole that exists solely to provide Da Boyz with more billions.

This is proof positive [as if there weren't already enough] that manipulation is not just endemic, it is out in the open, in your face and we don't care about it because you can't do anything about it. Governments around the world are currently held hostage by TBTF banksters and they know it. Any threat of sanctions or repercussions are very likely met with threats to shut the whole world down and watch it burn.