LME warehouse shake-up to spur competition, new locations

Reuters

* Independent storage operators due for resurgence

* Dominated by big groups such as Goldman Sachs, Glencore

* New warehouses set to open in U.S., Netherlands

By Eric Onstad and Josephine Mason

LONDON/NEW YORK, Nov 21 (Reuters) - Sweeping warehouse rulechanges proposed by the London Metal Exchange will spur aresurgence of independent storage firms after several years ofdominance by big groups such as Goldman Sachs andGlencore Xstrata.

The LME, the world's biggest industrial metals marketplace,announced a tougher warehouse policy on Nov. 7 to cut queues fordelivery to a maximum of 50 days from over a year in some cases,after persistent complaints from metal buyers.

Independent storage companies and their warehouse networks have been marginalized in recent years as the major groups havegenerated business by offering incentives to create queues.

Dutch firm Independent Commodities Logistics B.V. plans totake advantage of the proposed changes.

"Indeed we hope to benefit from the changes in LME rules," Managing Director Hans Cleton told Reuters.

"Some of the companies we have discussed this issue with ...are looking for an alternative and neutral place of storage sothat the queues are not continued."

The Dutch company, which has an LME-registered warehouse inthe port of Rotterdam, has applied to the exchange to open afacility in Moerdijk, which the exchange recently added as a newlocation.

In recent years, the bulk of LME metal stocks gravitated toa handful of locations dominated by banks and trading houses,all of which also trade metals on the exchange.

Those include warehouse firms owned by banks Goldman Sachsand JP Morgan Chase and by commodity trading groupsGlencore Xstrata and Trafigura.

These big players made incentive payments upfront to attractlarge volumes of metal to their warehouses, which earnedlucrative rentals from the long queues. LME rules allowedwarehouses to deliver out only a small fraction of what theycould take in.

Five locations where these big firms are active account for70 percent of total LME inventories.

Analysts expect the new LME rules to drive incentives down,even if this may be a slow process.

"With incentives falling by the wayside, smaller companieswill be better positioned to compete with the bigger players,"analyst Leon Westgate at Standard Bank said in a note.

One firm likely to benefit is C. Steinweg Group, the biggestindependent warehouse firm, which operates LME warehouses in 18locations but not in those with the longest queues. Steinweg hasa policy of not commenting to the media.

NEW LOCATIONS

In another move, the LME also has approved new warehouselocations, which could give scope for independent operators suchas Cleton's ICL to gain business.

The main thrust of the move, however, was to head offpotential logistics problems caused by the rule changes,industry sources said.

Within days of publishing the new rules, the LME gave thegreen light to Moerdijk in the Netherlands and Owensboro,Kentucky in the United States.

Moerdijk and Owensboro are not far from the two existinglocations with the most severe log-jams - Vlissingen and Detroit- each of which have around 1 million tonnes of aluminiumwaiting to be delivered, with queues of over a year.

From April 1, if the LME finalises its proposed changes,warehouses with queues over 50 days will have a choice betweenrefusing to accept fresh deliveries or stepping up deliveries.

This limitation could raise the prospect of market chaos ifa short-seller on the LME were blocked from quickly arranging toship metal to a warehouse to satisfy its market position.

"If you can't put metal on warrant in Vlissingen, now you'vegot Moerdijk. In the U.S., Chicago, Toledo and Detroit are alltied up, Baltimore's a long way away, so where do you go?" awarehousing source said.

The LME said the approval of new locations was notspecifically linked to the new rules. "We are constantlyreviewing the reach of our warehousing network and add to itwhere appropriate," spokeswoman Miriam Heywood said in an emailreply to a query.

Independent warehousing firms are likely to be keen on thenew locations, including at Owensboro, a big inland port whichis located near the downstream aluminium industry.

"The fact they're so close means metal will probably movedown the road to them, probably to new competitors. To have morewarehouses in different areas with the 50-day rule will levelthe market out," a metals trading executive said.

The major storage groups also could take advantage of thenew locations to keep generating rental income from existingqueues while accepting new arrivals in the new locations.

Another new U.S. location in Panama City, Florida, can serveas an alternative to New Orleans, where dealers say the waittime for metal can be months.

Warehouses in New Orleans currently account for around halfof the zinc and more than a third of the copper stocks waitingto be delivered.

The LME gave approval this month to small UK warehousingcompany Scale Distribution, part-owned by Australia's MacquarieGroup, to store copper in Panama City.

In the longer term, warehouse operators may find moreopportunities in China, said Nic Brown, head of commoditiesresearch at Natixis in London. The LME is owned by Hong KongExchanges and Clearing Ltd.

"We strongly suspect that the reason why the LME isaddressing warehouse queues is in order to allow it to open newwarehouses in mainland China. This may offer new opportunitiesfor expansion by warehousing companies," he said.

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