London Metal Exchange's bared teeth warn warehouses off steep rent rises

Reuters

* LME, UK regulator meet with warehousing companies

* LME makes clear it does not want big rent rises

* Steep rises could be flagged for investigation - sources

By Susan Thomas

LONDON, Dec 5 (Reuters) - The London Metal Exchange hasshowed its teeth to guard industrial users of materials likealuminium against steep rises in charges by owners of warehousesin its global storage network.

Warehousers say this tough new stance is scary enough towork.

One warehouse company source said it had got the messagethat the world's biggest marketplace for industrial metals,backed by regulators, can cause real inconvenience to any shedoperator that defies its wish to curb rents for storing metal.

"I think what would happen is any attempt to raise rentsbeyond what I could justify on inflation and real costs will beflagged for investigation," the source in Europe said.

"And they don't have to prove that you have done anythingwrong but it could take an awful long time to find that out. Doyou really want to put yourself through that?"

In theory, a manufacturer of, for example, aluminium cansshould be able to use the LME futures market to get hold ofmetal it needs urgently and pick up the consignment from one ofthe exchange-registered sheds dotted around the globe.

In practice, warehouse owners found it paid to build up bigstocks in some places and then plead logistical constraints todeliver metal to buyers very slowly, meanwhile charging rent.

Brewer and can maker MillerCoors has estimated a more than$3 billion cost to consumers from the delays. About a dozencompanies have filed U.S. lawsuits alleging aluminium pricefixing by big banks, trade houses and the LME.

The LME, under regulatory and legal pressure over complaintsof withdrawal queues of more than a year and large surcharges towithdraw material from warehouses, this year adopted rulesslashing maximum wait times to 50 days.

The LME, bought by Hong Kong Exchanges and Clearing for $2.2 billion last year, acted after years ofcomplaints.

It gave itself the power to act swiftly to prevent abuses ofthe system and it will have the authority to probe whetherwarehouses are manipulating flows of metal to create backlogs.

While shorter queues will help industrial clients, they willcurb profits for the banks and trade houses that own manywarehouses, including Glencore-owned Pacorini,Trafigura's NEMS and Goldman Sachs' Metro.

At stake are rental incomes that in some cases totalhundreds of millions of dollars a year, and some warehousingcompanies warned of sharply higher charges to compensate forshorter queues, according to sources familiar with the matter.

The LME said last month it had started a legal review ofwhat steps it can take on high storage charges including rent,and was looking with lawyers at how well its agreement with warehouse companies is working.

At the time the exchange's CEO Garry Jones emphasised itwould rather rely on regulatory persuasion and self restraint bywarehouses than influence what should be a market-drivensolution.

NOT MACHO ENOUGH TO TAKE ON LME

Last week the LME and Britain's Financial Conduct Authority(FCA) held a meeting in London and a global conference call withwarehouse companies, metals industry sources said.

Sources at the meeting said the LME and FCA had stoppedshort of threatening legal action against warehousing companiesplanning sharp rent rises. But they were very persuasive.

"They didn't say 'don't you dare' but they made it veryclear that there is regulatory scrutiny, especially for thosecompanies that have queues and are already in the spotlight,"one of the sources said.

"And if you're in the spotlight the last thing you want todo is increase your rents by an unreasonable amount."

Warehouse companies set their rents annually andindependently of each other, taking into account inflation,macro-economic conditions and LME rule changes.

They submit their proposed rent rates to the LME by Dec. 1every year before coming into effect the following April.

An LME spokeswoman declined to comment on warehouse rents onThursday. The LME would release the new rates at the end ofDecember, she added.

While the LME can ask warehouse companies to justify newprices, it has said in the past that it cannot limit rentincreases as this would be deemed as price fixing by theEuropean Union and therefore anti-competitive.

Daily rents for LME aluminium, the most widely stored metal,have risen almost 50 percent to a median 47 cents per tonnesince 2007/2008, according to Reuters calculations.

They jumped as much as 10 percent for some metals last yearto offset an earlier attempt by the LME to cut queues byinsisting on higher load-out rates.

Inflation in the euro zone was 0.9 percent in November, andis expected to average 1.1 percent next year.

"The last LME notice sent a pretty clear message. They donot want prices to go up," said a warehousing source inSingapore.

None of the warehousing sources would divulge what ratesthey had submitted, but all suggested one that took into accountinflation, genuine costs resulting from the rule changes andexchange rate fluctuations would be reasonable.

"I don't think anybody is feeling macho enough to take theLME head-on, by putting 20 percent on their rents and (loadingcharges) and getting sued by the people in their queue at thesame time," the first warehousing source said.

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