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LME warehouse consultation paves the way for improvements: CEO


The London Metal Exchange will be in a "better place" once its board has considered the findings of the consultation period on proposed changes to its warehouse regulations and come to a final decision on which steps to take, the LME's new chief executive, Garry Jones, told Platts in an interview.

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"We've been consulting on a lot of things, so what I'm hoping is that we have a portfolio of improvements we can make to the market, and do it all in one go," said Jones, who succeeded Martin Abbott as chief executive of the LME on September 30.

At the end of the process, "I do think we'll be in a better place," he added.

At the beginning of July, the exchange unveiled its latest initiative to tackle the issue of warehouse queues: a three-month consultation period on proposals to amend its warehouse regulations once again to calibrate deliveries into the sheds with deliveries out, albeit only in locations where the delivery-out queue already stretches to more than 100 days.

"We put out a document as...a stalking horse to say 'This is an idea. What do you think?' What we've had back is a lot of feedback on that and many other things, which is great," Jones said.

The consultation period expired at the end of September, but "the conversation is still going on. The consultation period has finished but we are having follow-up meetings with people," he added.

The LME board is due to meet later this month to consider the findings of the consultation period, Jones said, though he cautioned that it could take some time to fully process the results of over 70 meetings and numerous written submissions. The LME has already signalled that any changes to the its regulations would come into effect from April 2014.

Warehouse queues and the knock-on effect on physical premiums for various metals, particularly aluminum, have become a hot topic of conversation in recent months, attracting the attention of US regulators and the mainstream media.

The LME's current and proposed new warehouse regulations have attracted public criticism from both sides of the market -- major aluminum producers such as Rusal's Rusal and Alcoa of the US, and metals consumers like US brewing group MillerCoors and European steel association Eurofer.

Whatever the LME board's ultimate decision, "producers will say 'it goes too far,' Coors will say 'it doesn't go far enough.' But we're also talking to the vast majority of people in the middle who haven't really written complaints, who trade the market every day," Jones said.

"I would argue that more people have said 'your proposal seems reasonable' than have kicked up a fuss, but [the latter] tend to be more vocal and have prosecuted the argument in the press," he added.

One potential consequence of the public criticism of the LME as a pricing mechanism -- derived from the apparent disconnect between underlying futures prices and physical market premiums -- is the likely launch of a rival physically delivered aluminum contract by the US-based CME Group.

CME indicated this week that it plans to move ahead with an aluminum contract, though for the time being few details are publicly available regarding the contract specifications or the likely launch timing.

The planned new contract will follow two unsuccessful attempts by COMEX, a division of CME's New York Mercantile Exchange unit, to offer aluminum futures contracts. The last was delisted in September 2009.

"COMEX was successful in the markets it's in, and it tried to push into the markets a bit further. Aluminium has been there before, so what's different? So I'm waiting to see what the contract actually is, how it's going to work," Jones said.

"Nobody I've spoken to knows very much about it, including some of the biggest players in the market," he said. "Once we get through our consultation on warehousing and other things, lay out a very clear plan of what we're doing, we have every chance of pushing them back again."

But, he added, "I'm not saying they have no chance, of course...They'll throw a lot of money at it because they tried to buy this exchange."

In June 2012, the LME board agreed a deal for the exchange to be acquired by Hong Kong Exchanges & Clearing in a deal worth GBP1.388 billion ($2.16 billion at the then-prevailing exchange rate), following a bidding process which whittled down 15 preliminary expressions of interest to two final candidates.

--Andy Blamey,
--Edited by James Leech,