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HK bourse buys warehouse battle along with London Metal Exchange
July 25, 2012 / 4:10 PM / in 5 years

HK bourse buys warehouse battle along with London Metal Exchange

* Warehousing bottlenecks spread across benchmark base metals

* Goldman, Glencore sheds battle for zinc in New Orleans

* LME nickel body may seek delisting Dutch port as delivery point

By Harpreet Bhal and Maytaal Angel

LONDON, July 25 (Reuters) - The Hong Kong stock exchange is acquiring a growing controversy along with its purchase of the London Metal Exchange (LME), which critics say lets warehouses profit by delaying supplies of metals like aluminium and now copper, nickel and zinc.

LME regulations allow companies operating warehouses in a global network registered by the exchange to release only a fraction of their inventories each day -- much less than is regularly taken in for storage.

Clients of the LME, who want to collect material they have bought in the world's biggest marketplace for industrial metals, have to wait in queues to collect metal from a number of storage facilities, all the while paying rent to the warehouses.

The warehouse operators blame the delays on logistical bottlenecks -- the difficulty of seeking out and shifting metal in the vast storage sheds.

But the many critics say these delays are more a tactic to increase rental revenue, distorting markets and creating artificially tight availability in the midst of plentiful supply of metal.

They say that while metal producers may be happy with this state of affairs, it is undermining the LME's role as the market of last resort, where industrial users can always find material if needed.

"You can understand it from a producer's point of view -- they get paid for their metal. But in the long term the tactic is destroying industry," a physical metals trader said.

LME shareholders voted convincingly on Wednesday to accept a $2.2 billion offer by Hong Kong Exchanges and Clearing Ltd (HKEx) for the 135-year-old British institution, underscoring a global shift in manufacturing to China.

HKEx Chief Executive Charles Li said last month it planned to change the rules to shorten the wait for delivery of metal, the Financial Times reported, describing warehousing as a "very challenging issue."

But in a later statement clarifying his views, he added: "Our position is no different from the current LME position."

Martin Abbott, chief executive of the LME, has in the past attributed the problem to logistical challenges and low interest rates that make it easy to finance inventories.

The strategy of creating queues had been tolerated in aluminium, a metal that is in chronic oversupply and is also used heavily by banks and trading houses as collateral for financing deals.

But the storage play is now spreading to other metals which are needed at short notice for industrial use.

Traders said a warehouse firm owned by commodity trader Glencore is paying incentives to attract nickel to its sheds in the Dutch port of Vlissingen, and charging clients daily rent for metal that is holed up in queues of about a year.

"In Vlissingen you just can't take any of the nickel out because it's behind all the aluminium there. It is believed that the material is Russian and is being put into Pacorini sheds," a physical nickel trader said.

Traders also say thousands of tonnes of zinc have been shifting recently in New Orleans, where months-long queues have also developed as warehouse firms owned by Glencore and investment bank Goldman Sachs battle for metal.

Both Glencore and Goldman Sachs declined to comment.

While the warehouse tactics are not illegal, critics argue that some of these firms are keeping metal away from industry, and outbidding industrial companies for it.

WAREHOUSE GAMES

Vlissingen already holds ten percent of European nickel stocks, up from zero in March. MNI-NLVLI-TO Traders say the port's draw on spare European material is supporting regional premiums as well as LME prices.

LME data shows that Glencore's warehouse unit, Pacorini, owns 27 of 29 sheds in Vlissingen. Pacorini also owns 28 of the 59 sheds in New Orleans, site of the recent zinc backlogs, while Goldman Sachs warehouse unit Metro owns 22 sheds there.

LME stocks data also shows that in zinc, nearly 28,000 tonnes of 'warrants' or ownership titles were 'cancelled' or booked to leave LME sheds in New Orleans on a single day, July 3. On June 27, close to 60,000 tonnes were booked to leave the sheds.

Traders say these large quantities are unlikely to be for industrial use and appeared to be earmarked merely for movement to other warehouses where they would earn rent.

"It's warehouse games. There's not enough demand for a cancellation of that size and I know Pacorini and Metro have been fighting it out (in New Orleans)," said a physical metals trader.

U.S. zinc premiums are currently at around 7-8 cents per lb, almost double last year's level, having held up over the seasonal summer slowdown despite ample supply and a stalled U.S. recovery that has hit demand.

"It's much more lucrative for me to get LME-grade zinc and dump it in a warehouse than for me to sell it to clients that are industrial users. But my business is to sell to industrial users," said an industry source at a metals merchant.

In nickel, stock flows into Vlissingen have likewise helped raise premiums for the metal in Rotterdam and traders said it has become harder to get at a time of seasonally low demand.

WEAK SOLUTIONS

The LME has already accepted in principle proposals for warehouse companies to release at least 60 tonnes a day of tin or nickel or a combination of the two, a move designed to help customers avoid lengthy waiting times to get metal.

An LME nickel industry group had also considered delisting Vlissingen as an exchange delivery point, several sources said, following in the steps of copper, for which the port will be delisted after July 25.

But traders said the plans will not be enough to address the problem.

"That (extra load-out for nickel) has not come into force yet and I'm not sure when it will," the trader said. "It's still in the consultation phase but anyway the tonnage is miniscule so I'm not sure how much of a difference it would make." (Additional reporting by Melanie Burton in Singapore, Josephine Mason and Chris Kelly in New York, and Eric Onstad in London.; Editing by Veronica Brown and Anthony Barker)

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