By Eric Onstad
LONDON (Reuters) - The London Metal Exchange (LME) sees a rent cap at approved metals warehouses as a potential solution to high charges after signalling on Wednesday that it believes such a move is unlikely to foul of competition law.
The LME, the world's biggest market for industrial metals, has set out a series of reforms in recent years for its global network of warehouses after complaints by consumers about climbing rents and long backlogs for deliveries of metal.
A discussion paper released on Wednesday said that the LME did not believe that capping rents is likely to violate competition law, the main reason the proposal had not been seriously considered previously.
The 138-year-old exchange, owned by Hong Kong Exchanges and Clearing Ltd (HK:0388), asked for feedback from its users by May 18 before it makes a final decision.
"The aim of the LME is to address high levels of headline warehousing charges," the paper said.
"Possible reforms to the London Metal Exchange physical network (are) designed to address market concerns as to whether customers are treated unfairly."
Previously, the LME said that a rent cap could trigger possible legal challenges based on competition law.
The discussion paper, however, said that the exchange's provisional view is that capped charges would not restrict competition and that the benefits of addressing high charges would outweigh any negative effects of a cap.
The LME has expressed disappointment at increases to rental charges by warehouse owners for 2016, which take effect this month.
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 rise by 9 percent, up from 2 percent for the past two years.
Previous reforms to the LME's approved global network of more than 650 storage depots in 38 locations were aimed at easing backlogs in withdrawing metal.
The delays have meant fat profits for some warehouse owners who collected rent as long queues built up.
From May the LME will introduce a queue-based rent cap (QBRC), which means that rent payable on metal stuck in a queue longer than 30 days drops by half and is eliminated completely after 50 days.