The London Metal Exchange (LME) is today launching a market-wide consultation on two new proposals regarding the final elements of the 12-item warehouse reforms programme initiated in November 2013.
Following a two-month discussion period with the market, the LME has put forward recommendations to increase the minimum load-out rate for metal stored in LME-approved warehouses and to introduce a cap on the rent charged for metal in a queue. These proposals were selected from eight reform options outlined in a discussion paper released in March, aimed at addressing existing and potential future queues at LME warehouses, as well as the levels of rent and free-on-truck rates (FOT) charged by warehouse companies.
“We are pleased with the impact our reforms have already had in cutting queues at warehouses,” said Garry Jones, LME Chief Executive. “However, the proposals we are putting forward today are necessary to ensure that remaining queues and related issues are addressed in accordance with our regulatory obligations and original aims.”
Increasing the minimum load-out rate is expected to speed up the reduction of queues by raising the minimum tonnage of metal that warehouses with a queue must load out on a daily basis, regardless of how much metal is loaded in.
The new minimum daily load-outs for warehouses storing between 150,000 tonnes and more than 900,000 tonnes range between 2,000 tonnes and 4,000 tonnes a day, scaled according to the amount of metal stored.
The introduction of queue-based rent capping would also help to provide further certainty as to the elimination of existing queues, and could prevent the occurrence of future queues. Warehouse companies that fail to deliver out queued metal within 30 calendar days would be required to halve the maximum published rent charged to the affected metal owners. After 50 calendar days no rent could be charged at all. This would remove any economic benefit for warehouse companies in maintaining a queue.
To ensure no warehouse company is unfairly disadvantaged, it is recommended that queue-based rent capping be implemented with effect from 1 May 2016. By this time the market can expect remaining warehouse queues to be below the 50-day threshold, meaning that all warehouse companies will be equally impacted by the implementation of the new measure.
“The LME held more than 45 meetings with stakeholders and received 24 written responses from a broad cross-section of market participants with conflicting views on the proposals and on the desired outcome of further reforms,” said Matthew Chamberlain, LME Head of Business Development.
“Mindful of the differing viewpoints expressed, the LME considered each proposal within a framework that is legally robust, objective and proportionate for the LME market as a whole – all the details of which we’ve also published today to assist respondents with their feedback on our consultation proposals.”
Additionally, the LME cited the possibility of capping warehouse charges in the 2013 consultation report as an area of reform it was committed to consider. It was also one of the eight proposals tabled in the discussion paper. The LME recognises that charge-capping may bring a number of benefits, but notes it would have a significant effect on warehouse companies. Therefore, the LME proposes to take a ‘wait and see’ approach regarding charge capping. If the structural issues of high rent, FOT rates and inducements persist, the LME may consider introducing charge capping as set out in the discussion paper feedback.
The consultation on the proposals will run for six weeks, closing on 17 August 2015 and the LME welcomes feedback from market participants.
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LME Consults On New Warehouse Reforms
Date 01/07/2015