Column: New horizons but same old problems for LME warehousing

The exchange is also exploring the possibility of adding Hong Kong to the list, no doubt hoping that its owner Hong Kong Exchanges and Clearing (HKEx) can help overcome the Chinese authorities’ historical resistance to LME warehouses.

New locations may provide a booster for a warehouse network that has seen capacity contract and the number of operators decline over the last 10 years.

However, old problems persist.

There was a 253-day queue to load aluminum out of LME warehouses in Malaysia’s Port Klang at the end of June, the longest waiting time since November 2016.

The LME storage business also remains highly concentrated with four dominant operators, a potential problem when one of them is facing an uncertain future.

Shrinking space

Total LME registered storage capacity at the end of June was 3.3 million square metres, down from 4.3 million three years ago.

The pace of net shrinkage slowed to 44,000 square metres over the last year and the downtrend shows signs of bottoming out. The number of registered warehouses grew by 15 units to 468 after falling to a multi-year low in June 2023.

The three-year decline in registered capacity reflected a period of low exchange stocks as combined warranted and shadow off-warrant inventory fell below one million metric tons over the second half of 2022.

Stocks have since risen to 2.3 million as of the end of May, although inflows have been tightly concentrated on just a handful of locations.

Russian aluminum has accumulated in the South Korean port of Gwangyang, while non-Russian aluminum has been dumped in Port Klang. This year’s heavy inflows of both lead and zinc have mostly ended up at Singapore warehouses.

All three locations have bucked the trend of declining storage capacity over the last year and ISTIM UK Ltd’s additional 11 warehouse units at Port Klang were the single biggest component of the broader year-on-year increase.

Join the queue

Rent-sharing is the common denominator behind this year’s big deliveries of metal into the LME system. Such deals allow the entity that warrants the metal to earn a slice of the future rental revenue.

The buyer of that metal may be understandably reluctant to pay rent to a potential competitor but the only way to escape the contract is to physically load the metal out and deliver it to another warehouse company.

The larger the original warranting, the greater the potential for a queue. ISTIM warehouses in Port Klang received 652,525 tons of aluminum in May. The cancellations began almost immediately as buyers looked to move their metal. ISTIM had 505,050 tons awaiting physical load-out by the end of June.

It’s an echo of the 2010s, when the LME’s load-out problems caused user outrage and drew the unwelcome attention of US regulators, who wanted to know why it would take 702 days to take physical delivery from LME warehouses in Detroit.

Subsequent reforms to the LME system mean that such self-perpetuating super-queues are no longer possible. What we get now are what the exchange calls “operational” queues.

Which may not be much comfort for those late to the aluminum logjam in Malaysia. They’re unlikely to see their metal until this time next year.

Dominant four

ISTIM’s ability to attract such huge tonnages to its warehouses has made it a dominant presence in the LME delivery system. The company was storing 55% of all warranted LME stocks at the end of June.

The other three major players are Access World, C. Steinweg and the Pacorini Group. Between them they were storing 92% of total inventory at the end of June and they currently account for 344 of the total 468 units listed globally.

This is also a throw-back to the last decade, when Metro International, then owned by Goldman Sachs, industrialized the queue model and built a dominant LME storage position in Detroit.

Access World, acquired by Glencore in 2010, did the same in the Dutch port of Vlissingen, generating a load-out queue of 771 days at one stage.

Smaller operators struggled to compete then, and clearly they still do. Many who joined the LME warehouse business in hope of getting a slice of the queue action in the 2010s have since withdrawn.

The number of LME-registered warehouse operators has declined from 36 to 25 over the last five years and that includes nine that offer LME services in a single location.

Warehouse for (re)sale

The uncertain status of Access World highlights the problems that can be caused when LME stocks are concentrated in such a small pool of warehouse operators.

Glencore thought it had sold the company to Global Capital Merchants (GCM), a company registered in the British Virgin Islands, in 2022.

However, Access World is back on the sales block after the buyers failed to make full payment and Glencore is reportedly scouting for new potential owners.

Access World warehouses held almost 12% of LME on-warrant stocks at the end of June.

A decade of reform

The LME, to its credit, has spent a lot of time and effort trying to smooth out the many wrinkles in its delivery system, which – like everything else on the 147-year-old exchange – is quite distinct from what you would find in any other futures market.

The queues have never really gone away but multiple tweaks of the rule-book have at least constrained them and the amount of money that can be made from them.

The exchange has also massively enhanced transparency around its delivery network. A daily registered stocks report has been supplemented with monthly updates on off-warrant stocks, stocks by warehouse operator and, of course, queue length. This column has drawn heavily on all of them.

Yet, just how much more efficient is the LME’s delivery network after a decade of reform?

A limited number of operators still seem to dominate the on-warrant storage business and 253 days is still a long time to wait to get your metal.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by David Evans)