No overnight solution to LME metal queues - LME executive

Reuters

* Detroit queue will take 2 years to disappear - analyst

* Analyst warns of greater volatility, lower liquidity inaluminum

By Josephine Mason

MIAMI, Nov 13 (Reuters) - The London Metal Exchange's rulesoverhaul will not solve its four-year warehousing crisisovernight, an LME executive warned, while an analyst said themeasures could increase volatility and hurt liquidity in theexchange's top-volume contract aluminum.

Under pressure from angry endusers, including brewer and canmaker MillerCoors LLC , who say LME warehousingpolicies have led to years-long wait times to take delivery ofmetal and inflated physical prices, the exchange last week saidit would slash the maximum queues for metal.

The LME's storage practices have drawn scrutiny from U.S.,EU and British regulators.

In the latest plan, warehouses with years-long queues wouldhave to release more stocks once the wait time breaches 50 days,rather than the 100 days proposed in July.

Still, "it's not going to happen overnight," LME head ofstrategy and implementation, Matthew Chamberlain, told delegatesat the American Copper Council annual conference on Wednesday.

The latest measures won't come into effect until April 2014and even then it might take years for the queues to disappear.

Barclays Capital base metals analyst Nicholas Snowdon saidit will take two years for the aluminum queue in Detroit tovanish. The Detroit warehouses hold over a quarter of the LME's5.3 million tonnes of aluminum stocks.

Lawsuits have been registered against warehouse owners,including Goldman Sachs, JPMorgan Chase & Co,Glencore-Xstrata and Trafigura, of artificiallyinflating waiting times and lines to boost rents for warehouseowners and drive metal prices higher.

Seven locations out of the LME's more than 30 will beaffected by the rule changes: Vlissingen and Rotterdam in theNetherlands, Antwerp in Belgium, Detroit and New Orleans in theUnited States, Johor in Malaysia and Singapore, Snowdon said.

OUTSIDE STORAGE

In the near term, the latest measures have pressuredphysical aluminum prices as warehouse companies have reined inincentives paid to traders to store metal in their facilities.

Premiums, which are paid on top of the LME price forphysical delivery, have fallen to around 9 cents per lb in theU.S. Midwest from record highs of 12 cents before the LME firstannounced plans for sweeping changes in July.

When buying metal, industrial users are forced to matchthose incentives to prevent metal being lured into storage infinancing deals.

While incentives have been quietly curbed, financing dealsare not expected to disappear any time soon, supporting premiumsand potentially roiling the market as traders are now beingenticed by cheaper offers for storage outside of the exchange.

Low rents are particularly attractive for so-called cash andcarry deals which keep metal off the market for years at a time.

Alongside a wide forward price structure and low borrowingcosts, those deals are now more profitable than before, Snowdonsaid, and have already lured large tonnages of aluminum intostorage outside of the exchange.

"Nothing's changed. The metal's still not going toconsumers," said one market source, referring to the bigdrawdowns in LME stocks.

The average rent of LME storage is around 47 cents per tonneof metal per day, while the non-exchange storage costs aresubstantially lower.

Snowdon said that is evident in the faster pace at whichtraders have canceled stock in Detroit, effectively putting warehouse on notice that they want to take delivery of metal.

Detroit aluminum stocks have fallen 5 percent since July andover 70 percent of the 1.4 million tonnes of aluminum there isdue to be delivered out.

Most LME-registered warehousing companies run off-exchangefacilities, often in the same locations in which they operateunder the LME.

"One concern is the trend of off warrant metal will promotevolatility and less transparency in stocks," Snowdon said.

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