By Pratima Desai
LONDON (Reuters) - New measures to increase the amount of metal withdrawn from warehouses, relative to material brought in, will help to reduce queues faster at London Metal Exchange (LME) registered warehouses, the exchange said on Monday.
The LME, the world's oldest and biggest market for industrial metals which is now owned by Hong Kong Exchanges and Clearing Ltd (HK:0388), oversees warehouses where companies that buy metals on its futures market can take delivery of quality-assured supplies if needed.
Big banks and traders that own or owned warehouses and charge rent have profited from letting long queues build up. Some also keep huge stocks of aluminium tied up, unavailable to manufacturers, in long-term financing deals.
Effective Aug. 1, the so-called decay factor under the Linked Load-In/Load-Out Rule (LILO) will rise to 1.0 from 0.5 previously. That means companies will now have to withdraw as much metal as they bring in to a warehouse, compared with the previous requirement to take out half of what was deposited.
The LME's LILO rule is aimed at tackling what the exchange has called embedded queues at locations such as Detroit and Vlissingen and places on warehouse operators additional load-out obligations over and above minimum stipulated requirements.
"This adjustment in the decay factor will, broadly, increase the rate at which queues will fall at affected warehouses, provided such warehouses continue to load in metal," the LME said.
The LME's March report shows queues to load out primary aluminium at Vlissingen at 510 calendar days and at Detroit the queues were 436 days compared with the 50 day delay deemed to be acceptable.
The changes come after a consultation with LME-listed warehouses and other interested parties.
Those in favour said the changes were necessary to cut current queues and to create a disincentive to accumulation of future queues.
"One respondent proposed increasing the decay factor to 1.25x for aluminium for the next two years," the LME said.
"Certain respondents argued that LILO as amended, by itself, would be insufficient to reduce queues in a timely manner, given increases in capacity at certain DP Warehouses and the delays in implementation to LILO."
Affected DP warehouses are those with queues longer than 50 days.