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LME to 'compel' off-warrant stocks reporting to boost market transparency

London — The London Metal Exchange will attempt to compel the reporting of metal stored off-warrant under agreements with the LME, to increase transparency over metals stocks, the exchange announced Friday.

A reporting obligation will take effect February 1, 2020, along a lengthening of Queue-Based Rent Capping (QBRC) periods -- designed to allow warehouse companies compete more effectively for metal -- and a restriction on so-called evergreen rent deals (arrangements whereby metal owners retain an interest in warehouse rent on warrants which they have previously sold), as the exchange seeks to implement further warehouse reforms.

A new LME complaints procedure will take effect November 15, 2019.

"The London Metal Exchange will proceed with its proposed package of measures aimed at optimizing its warehouse network for the benefit of the global metals industry," it said.

The decision to proceed with the reforms was taken after the launch of a discussion paper in March, a seven-week consultation on the LME's proposals, extensive market engagement and 13 formal responses from key players.

The LME received "a largely supportive set of responses" to its proposals, which have aimed to combine "both logistical and financial drivers to bring greater vibrancy to the LME market," LME CEO Matthew Chamberlain said. Follow-up monitoring will be carried out "to appropriately address concerns."

"Generally we like a predictable market," Chamberlain told reporters in London. "We don't like to surprise the market."

Between 2013 and 2015 the LME carried out a wide-reaching warehouse reform following a period of long warehouse queues in some metals, particularly aluminum, which had led to market speculation. The reform covered areas including charge-capping -- the setting of limits on rents and charges -- and attempted to ensure that the warehousing system continues to support the LME pricing mechanism.

In recent years, however, there has been considerable growth in the availability of off-warrant warehousing, which has given market players affordable options to store metal without warrants or guarantees in locations outside of the LME-affiliated warehouse and listing system. Such stocks are mainly unquantified, eroding market transparency.

The latest reforms should improve the efficiency of the exchange's warehousing network, and potentially attract more metal into the LME system.

There are currently over 500 LME-approved warehouses in 35 locations across the US, Europe and Asia; The LME does not, however, own or operate warehouses, nor does it own the material they contain.

OFF-WARRANT STOCK REPORTING

The LME now intends to compel the reporting of metal stored under an agreement requiring the use of LME-registered sheds, or under an agreement where the owner has a right to warrant metal on the LME in the future. This should enable the market to trade "on the basis of a more holistic view of metal availability, even if core warrant stock is limited," it said.

Three months' data will probably be needed to "see if reporting of off-warrant stocks will work," Chamberlain said, indicating that "significant" penalties could be applied to those failing to report. An end-of-month number relating to these stocks should be published on the LME website, he said.

"The LME believes that it has a duty to address concerns around stock transparency and has the right to compel market participants to report stock levels where the corresponding commercial agreement invokes the LME, regardless of the private relationship between the parties to the agreement," the exchange said. To facilitate the data collection, the LME will provide a template to be completed by warehouse companies, but will not require the identity of metal owners to be disclosed to the exchange, it said.

However, some stock may not be reportable simply by virtue of its storage agreement, it acknowledged.

"The LME will therefore work with the market to incentivize the voluntary reporting of off-warrant stocks. Initial engagement will focus on the benefits to the industry of voluntary reporting; however, the LME will also consider future measures as appropriate, which may include placing a greater warranting fee on metal not voluntarily reported at the earliest opportunity," it said.

QUEUE-BASED RENT CAPPING

The QBRC regulations to be introduced February will mean rent would become free after metal has remained in a warehouse queue for 80 days, compared with the current 50 days, with the change to be phased-in over a nine-month period.

The LME sees a "risk" involved in following this route given it may still not be able to compete with private storage rates, and some metal owners will always choose non-visible storage regardless of other factors. Nevertheless, the LME does intend to freeze rent and FOT (Free on Truck) rates until 2027-28 to ensure no further widening occurs between LME and non-LME storage costs, it said.

EVERGREEN RENT DEALS

The LME's restriction on arrangements where metal owners retain an interest in warehouse rent on warrants which they have previously sold, is designed to allow warehouse owners to incentivize metal owners bringing fresh stock into the network, it said.

"The LME intends to only allow warehouse companies to enter into such an agreement with the party placing metal onto LME warrant (and not with metal owners who have purchased metal that is already warranted)," it said.

--Diana Kinch, newsdesk@spglobal.com

--Edited by Jonathan Dart, newsdesk@spglobal.com