London Metal Exchange row lifts lid on metal warehousing

The cover has been lifted just slightly on a discreet corner of the global warehousing market. The London Metal Exchange is the leading market for the buying and selling of metals across the world. The total value of contracts traded on the exchange is comfortably over US$10bn. It relies on a network of warehousing companies to manage the logistics of what is known as the ‘physical’ market.

These warehousing companies operate a global network of inventory locations storing and handling huge quantities of aluminium, steel billet and other ferrous and non-ferrous metals including gold and silver on behalf of the exchange and its traders. The warehousing companies are a mix of third party providers and companies owned by participants in the exchange, including names such as C. Steinweg, Henry Bath and CWT Commodities. Located in all of the principal economies of the world they command warehousing space running into many millions of square feet. Yet not all of their customers are happy.

Over the past few years anger amongst both metal traders and producers has increased over what they see as an attempt by warehousing companies to increase the stocks they hold enabling them to increase rental revenue. The mechanism for doing this, it has been suggested, is to slow-down the loading of metals leaving the warehousing, resulting in long queues of vehicles waiting to collect loads.

Purchasers of metals assert that this practice is driving-up the price of metals, not least by reducing the liquidity of stock, as buyers struggle through the queues at warehouses to get their orders.

Consequently the owners of the London Metal Exchange, the Hong Kong Exchange & Clearing (HKEx) – who have only recently bought it off a group of banks and traders who use the LME –  have published some suggested proposals to speed up the delivery of orders for metals. These include “measuring all of the metal loaded into a warehouse over a three-month period. If there is a queue of more than 100 calendar days the affected warehouse would be expected to deliver out additional metal based on a formula” whilst “a warehouse currently required to deliver out a daily tonnage of 3,000 tonnes would, under the proposal, need to load out at least 1,500 tonnes per day more than it loads in.”

Neither producers nor purchasers are happy with this, with the latter saying that the proposals do not go far enough whilst the former, such as the Russian aluminium producer Rusal’s Chief Executive Oleg Deripaska raged that “the intent of the HKEx to accelerate the transfer into the market of an additional 2m tonnes of aluminium, accumulated and stored since the financial crisis, is an unprecedented intervention and one that Rusal strongly objects to”.

Stepping back from the arguments within the LME, this row not only illustrates again that logistics is the under-pinning of so much of the world’s economy but also sheds little on what must be a very large and possibly highly lucrative logistics market segment.