Post on 23-Feb-2018
LME Warehousing
Matt Chamberlain Head of Business Development
Platts Aluminum Symposium 2014
LME Copper
1877
LME Tin
1877
LME Lead
1920
LME Zinc
1920
LME Aluminum
1978
LME Aluminium Alloy
1992
LME Nickel
1979
LMEX
2000
LME NASAAC
2002
LMEminis
2006
LME Steel Billet
2008 2010
LME Molybdenum
2010
LME Cobalt
Aluminum sits at the heart of the LME ecosystem…
Slide 2
...and represents our most traded contract 1.7bn tonnes of aluminum transacted in last twelve months
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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Tin, Lead, NASAAC, Al Alloy, Plastics, Steel, Minor metals, minis and LME Swaps
Nickel
Zinc
Copper
Aluminium
Slide 3
Market relevance demonstrated by stock levels… Significant inflow of stocks into LME warehouses
Slide 4
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Warehouse F Warehouse G Warehouse H Warehouse IWarehouse J Warehouse K Warehouse L Warehouse MWarehouse N Warehouse O Warehouse P
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Operational queues
Structural queues
Key: Consultation announcement Decision announcement
…but stocks have given rise to queues…
Slide 5
Pre-consultation Internal LME review
Consultation Over 70 stakeholder meetings
33 written responses
LME Board Regulatory and legal review
Other proposed approaches
Full market engagement
…resulting in 2013’s comprehensive market consultation
1 July 2013
30 September
2013
7 November
2013
LME analysis Notice
25 October 2013
Merits of the Proposal
Unintended consequences
Implementation details
Economic analysis
Detailed report published
Slide 6
“Grandfather” existing metal If no more metal is loaded-in, then load-out rates do not change
Key principles of the Linked Load-In / Load-Out Rule (As revised following the Consultation)
Target warehouses with queues over 50 calendar days All other warehouses unaffected
Compromise between: • Metal users (provide a visible and predictable horizon) • Warehouse operators (some queues may always appear based on
warrantholders’ cancellation activity)
Link load-out to load-in If more metal is loaded-in, then more metal needs to be loaded-out
In the medium-term: • Stops queues growing • Shrinks queues
Slide 7
Load-out scenarios Load-out will always be greater than load-in
For warehouses with queues over 50 calendar days Example warehouse: current daily load-out requirement 3,000 tonnes
New rules, tonnes
Load-in 0 1,000 3,000 5,000
Minimum load-out 3,000 3,500 4,500 6,500
Excess load-out 3,000 2,500 1,500 1,500
W A R E H O U S E C H O I C E S P E C T R U M If warehouse logistically-constrained on delivery out – maintain current requirements
If warehouse flexible on delivery out – can load-in more
metal
Slide 8
A comprehensive warehouse reform package Detailed, practical and balanced set of measures
Enactment of the Proposal (with 50-day queue threshold) Warehouse data transparency
Enhanced LME investigation and punishment powers for abusive queues
Investigation of premium hedging and related solutions
Separate load-out rate for steel
Warehouse logistical review
Warehousing Agreement legal review
Best-practice information barrier policy
Commitment of Traders transparency
Creation of Physical Market Committee plus ongoing six-monthly reviews
Assess powers to limit rents in queues as a future policy option Powers for action over rents / FoTs
Slide 9
Value of LME
warrant
1. Economic background LME’s view of the relationship between queues and premiums
Market failure
“All-in” price inflation
Difficulty in price discovery
Difficulty in hedging
Slide 10
Brand discount
= Free market (“all-in”) metal price
—
— Location discount
— FoT charge
— Rent payable in queue
— Opportunity cost of waiting in queue
“Normal” discount
“Queue” discount
No evidence of: Valid market concerns:
Total discount
Economically a discount – but observed by the market as a premium
2. Queue threshold Key discussion point in the Consultation
LME has decided to set threshold at 50 days. Note: LME will have the power to take action against abusive queues even below 50 days
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What is the largest historical operational queue?
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Slide 11
Virtually no physical users in queues Danger of “operational” queues
being caught under a rule designed to address “structural” queues
Arguments for longer
Market of last resort – physical users should be able to access if required
Further reduces impact on premiums per economic analysis
Arguments for shorter
Second-order, but likely quicker, impact on premiums, given lower “incentive bid” from
warehouses Some shorter-term technical impact
possible from financing “bid”
Queues will fall over a period of years May rise first due to user cancellations – but will
eventually, mathematically, fall
3. Queue decay factor Impact on both queues and premiums
Queue impact Premium impact
0.5 decay factor retained (modelled on basis of current rents and FoTs) – but remains a key LME policy lever
Slide 12
Systemic self-discipline
Three lines of defence
Currently considerable user, regulatory and political scrutiny of the LME warehousing system
Any attempt by warehouses to increase their fees in the short term is likely to be viewed in an extremely negative light by key market stakeholders
Decision to maintain the 0.5 decay factor based on current rent and FoT levels
If charges were to increase (with impact on those in queues), valid for LME to compel quicker decay to alleviate impact on those in queues
Competition law continues to evolve
Appropriate that LME continually updates its advice in this respect
4. Rents and FoTs Impact on both queues and premiums
“Load-in and sell” warehousing model – metal owner loads-in metal, and immediately sells warrants on the LME
Warehouses compete not on low rates or strong service, but on incentive paid to the original metal owner
Incentive funded by charges on the buyer of the warrant
Warehousing market still competitive – but competes on incentives
Consequent impact on premiums per LME economic analysis
Both an existing market concern, and (if charges rise further) a potential unintended consequence of the Proposal
Use of the decay factor LME powers to cap
Slide 13
5. Warehouse ownership Existing best-practice information barriers
• Highly unlikely that LME could exercise powers to restrict warehouse ownership
• As such, appropriate response is to ensure validity of information barriers
• LME already requires and ensures best-practice information barriers
• Market engagement to communicate the key role of these protections to the LME system
Slide 14
6. Representation of physical metals community Enhanced engagement in the LME governance structure
• Physical users already key members of metals committees and User Committee
• However, clear market desire for a specific forum for physical market issues to be discussed
• Creation of Physical Market Committee, with representation on Warehousing Committee, User Committee and clear escalation route to the LME Board
Industry Non-industry
Slide 15
Split of LME metals committees members
(as of 25-Sep-13)
7. Other items considered in the Consultation All user feedback received full analysis and discussion
Slide 16
Other actions announced
Warehouse data transparency Commitment of Traders transparency Full physical network logistical review
Enhanced LME investigation and action powers against abusive queues
Investigation of premium hedging and related solutions
Separate load-out rate for steel Assess powers to limit rents in queues
as a future policy option
Unintended consequences considered
Logistical constraints Lack of warranting capacity
Warrantholder activity Alternative routes to build queues
Loss of metal from the LME network Complexity
Implementation details considered
Queue scheduling Rewarranting
Warrant creation scheduling Historical warehouse investment
Licensing criteria Enforcement
Other approaches considered
Quantitative load-out increase Per-shed load-out rates
Warrant fungibility Per-metal queues / warehouses
Physical user queue Ban incentives