The London Metal Exchange, the world’s biggest industrial-metals marketplace, altered its rules to speed up withdrawals from warehoused stockpiles amid consumer complaints that prompted scrutiny from U.S. regulators.
Changes to delivery requirements will affect warehouses where waiting times exceed 50 calendar days, a notice e-mailed to LME members today showed. The exchange’s original July proposal pertained to sites where waits were longer than 100 days. The LME also will review its warehouse system every six months, according to the notice.
Consumers of metals including brewer MillerCoors LLC complained that lengthy waits for stockpiled supplies inflated costs. That spurred U.S. regulators to subpoena documents from warehouse operators including a Goldman Sachs Group Inc. unit, according to people with knowledge of the probe. The changes are scheduled to take effect April 1, said the LME, founded in 1877 and now a unit of Hong Kong Exchanges & Clearing Ltd.
“Fifty days seems a reasonable proposal,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone today. “They had to reach a compromise with all market participants. It was apparent to everybody that 100 days was too high. Fifty days is in line with what market was expecting.”
Warehouses with waiting times above 50 days will be required to ship out metal every day exceeding the amount they take in by at least 1,500 metric tons under the changes. The LME also plans to create a Physical Market Committee that will have a “substantial role” in the warehouse reviews and to commission a full external logistical review of warehousing.
“We believe that the amended proposal is, on balance, the best solution for all market users,” Garry Jones, who became the exchange’s chief executive officer at the end of September, said in the statement. “The LME has a duty to the entire metals community to run a fair and orderly market.”
Withdrawals of aluminum from stocks take a near-record 18.9 months in Detroit and 18 months in the Dutch city of Vlissingen, the two biggest repositories for LME inventories of the lightweight metal, researcher Harbor Intelligence estimated Nov. 4. Premiums added to LMEprices reached the lowest levels in more than a year after the exchange made its original recommendation, before rebounding last month.
The LME, where investors bought and sold contracts worth $14.5 trillion last year, oversees more than 700 warehouses around the world. Vlissingen, Detroit, New Orleans and Malaysia’s Johor have the longest waits for withdrawals.
“Additionally, the LME will investigate and act to prevent warehouse companies unreasonably incentivizing the formation of queues,” the exchange said in the notice. The 50-day threshold will enable the LME “to better deliver a market of last resort to physical metals users,” it said.
The original proposal was criticized as a potential spur to further market distortion by United Co. Rusal, the world’s largest aluminum producer. Alcoa Inc., which ranks first in the U.S., urged the LME to suspend the plan. MillerCoors and soft- drink makers, who use aluminum in cans, said the proposed changes would do too little to reduce backlogs.
Goldman Sachs said last month policies aimed at reducing the queues will affect the economic role of the exchange market and changes to warehouse policy may lead to more metal being stored outside the exchange.