LME proposes changing rent cap, stock reporting rule

The London Metal Exchange (LME) today issued proposals to change its rent cap rule and stock reporting as part of reforms to increase the attractiveness of LME warehousing and enhance market transparency.

Rent reform aims to boost warehouse stocks

The LME warehousing committee has proposed changing the queue-based rent capping (QBRC) parameters to reduce the amount of time warehouses must hold metal rent free when it is in a queue to be loaded out.

Under this proposal, rent would become free after the metal has remained in a queue for 80 days.

Stockholders withdrawing metal from the LME warehouse currently pay half-rent after a 30-day queue to load out metal and rent becomes free after 50 days.

"Some warehouse operators believe that this may enable them to attract and incentivise larger quantities of stock into LME storage, while still providing protection for metal owners against structural queues," the LME said.

The QBRC rule was initially implemented in 2013 to reduce the queue to load-out metal at five warehouses in special locations in the LME global network. This measure has reduced the metal load-out time to the 50-day threshold but also cut the volume of metal stored in the global LME warehouse network.

The warehousing committee has also advocated that metal owners that are locked in to "evergreen rent" deals should be granted the ability to exit the deal by cancelling the warranty on their stocks without loading out the metal.

Evergreen rent deals are agreements between metal owners and warehouse operators whereby metal owners continue to get a share of the warehouse rent for stocks even after the ownership of the metal has changed hands. Consequently, the new metal owners cannot renegotiate rent deals with warehouse operators and the only way to end the agreement is to load out the metal.

"Some warehouse operators believe that this may reduce the practice of metal being withdrawn from warehouses purely to end these evergreen payments," the LME said.

The committee has also proposed a possible reduction in headline warehouse charges. Some warehouse operators believe that a reduction in headline warehouse charges will incentivise greater use of the LME network by logistics-focused metal owners.

LME chief executove Matthew Chamberlain acknowledged at a press briefing on 28 March that usage of the network has fallen as metal owners have increasingly moved towards storing material off-warrant. This has been partially driven by the lower costs for off-warrant storage in warehouses that have raised their standards close to the level at which the LME can offer.

"I think this is a great opportunity for warehouses to come together and for the LME to reciprocate, to make a better environment for warehouses that will not hurt anyone else," Chamberlain said.

Shift to load-out stock reporting to improve transparency

The LME has proposed halting the publication of warrant cancellations at LME warehouses and shifting to publication of stocks scheduled for load-out in order to improve physical market transparency.

The exchange currently issues daily reports that detail the total volume of metal held in its global warehouse networks and the volume of stocks that have been cancelled. The volume of metal cancellations can influence prices and market sentiment as the withdrawal of metals from warehouses is seen as an indicator of demand by investors.

But metals that have been cancelled are not always loaded out and delivered for real end-user consumption. Stockholders sometimes cancel and re-warrant stocks purely for the purposes of influencing LME stock reports, the LME said.

Potential alternatives to the current reporting system would be to combine "live" and "cancelled but not scheduled for load-out" stock into a single category and to launch a new second category of "scheduled" tonnes. The LME said it would also consider reporting all three categories.

Another new proposal to enhance market transparency is eligible stock reporting, whereby the stocks of unwarranted metal in LME-registered sheds would be publicly reported.

And the LME has also proposed improving the traceability of copper back to its producer by implementing "a unique and indelible identification label" to be marked on the top cathode of every copper bundle. Copper cathode can only be warranted if it bears the label.

Under existing practices, the copper labels are placed on the bundling strap, which can fall off during the process of fork-lifting. It is common for stockholders to conduct visual inspections without the actual label.

Electronic CoA adoption heads efficiency drive

The LME's main new proposal to boost the efficiency of warehousing is to mandate market-wide adoption of electronic certificates of analysis (CoA), so that relevant documentation can be more easily provided to those taking receipt of metal in LME warehouses.

The exchange is also seeking to clarify whether warehouse operators that load-out more than their minimum daily requirements may apply different rules to the additional tonnes loaded out. Some warehouse operators believe that this may provide greater operational flexibility to clients.

Additionally, the LME will discuss allowing denomination of free-on-truck charges in US dollars, rather than the current model of doing so via the local currency of the physical warehouse shed. This would bring the charges into line with the current practice for rents.

The LME launched a two-month consultation today to seek market feedback on the nine proposals made across the three outlined categories. The discussion paper is open until 31 May.