LME warehouses poised for transformation on rent capping -sources
By Eric Onstad LONDON (Reuters) - Several metals storage companies are set to support an option floated by the London Metal Exchange (LME) to limit the amount of rent they can charge, marking a huge change after years of jostling for advantage, sources said. The LME, the world's biggest and oldest market for industrial metals, has imposed a series of warehousing reforms in recent years after complaints by consumers paying rent to store metal while trapped in backlogs to get delivery of the material. Previously, the LME had said a rent cap might trigger legal challenges based on competition law, but the discussion paper said the exchange's provisional view was that legal issues were no longer an obstacle. The exchange argues that warehouses do not compete on the basis of headline charges but instead on discounted rates. In April, the LME issued a discussion paper on further reforms to its global network of more than 600 approved warehouses in 37 locations, saying capped rents were a potential solution to high charges. Four sources in the sector told Reuters that several major warehousing firms, weary of all the recent changes, would accept rent capping as the best of a range of solutions. "If they are going to freeze the rents, it would make a level playing field and it would certainly allow everyone to work and not have to answer any more discussion papers," said one source, who like the others declined to be identified because he was not allowed to speak to the media. Another source agreed, but only if the LME capped rents around current levels and did not try to cut them. CAT-AND-MOUSE GAME The 139-year-old exchange, owned by Hong Kong Exchanges and Clearing Ltd <0388.HK>, had asked for feedback from its users by May 18 before it provided an update in July. "The warehouses are having now to come up with a pragmatic view, which has been determined by the reforms," said Robin Bhar, head of metals research at Societe Generale. The LME had expressed disappointment at increases to rental charges by warehouse owners for 2016, which took effect in April. The average stock-weighted increase in rents this year is 7 percent, against 3 percent in the previous two years. Free-on-truck (FOT) charges rose by 9 percent, up from 2 percent for the past two years. One advantage of rent capping is warehouse managers would no longer have to guess what rivals were planning during the annual blind submission of proposed rental levels. The process is a game of cat-and-mouse in which each firm seeks to push through higher rents than rivals, but not so high that the LME is unhappy. "It's a gamble at the end of each year and whoever has the highest level and gets away with it is the winner for the next year," another source said. Warehouse operators were largely opposed to another proposal in the discussion paper to change the warehouse contract so that FOT charges, which are levied when metal is removed from storage, are prepaid. This would shift payment of FOT charges to the seller of the metal on the LME from the buyer. "There are huge complications involved in changing to an FOT contract. What do you do with all the open interest that goes 15 years into the future in some cases?," one source said. (Additional reporting by Pratima Desai; Editing by Veronica Brown and David Evans)
