In a bid intended to lure back ever-shrinking inventories of metals including aluminium, the London Metal Exchange is attempting to renegotiate rental rates with its network of metal warehouses.
“The LME has initiated a discussion with the warehouse community to find a solution to collectively cut the relatively high headline rents which can keep metal out of the LME network,” explained a spokesman from the LME.
At present, rents for aluminium on warrant are around US$0.54 per metric ton, with the LME earning 1.1 percent. Rents charged for metals not on warrant are US$0.10 per metric ton or less at present. However, stocks of aluminium held at those warehouses have plummeted over the last decade, with the sharpest decline occurring over the past three years.
Stocks on hand of aluminium are currently just over 1.33 million metric tons, which is the lowest level its been in almost nine years, down from roughly 5 million metric tons in 2014. According to experts, the drop is due largely to reforms aimed at reducing waiting times for consumers, which included limiting warehouse rents.
“People have a very clear incentive to keep metal off warrant,” explained an unnamed warehousing source who spoke to Reuters. “Stocks should reflect an oversupplied or undersupplied market, but LME aluminium stocks are a percentage of the total.”
Aluminium stocks are attractive as targets for financing deals whereby the buyer purchases the stock with borrowed money and holds the stock for sale at a higher price. As many of those inventories are held under rent deals, which involve the warehouse receiving a rebate if the stocks are held there for a particular time period, lowering overall rents could make such rent deals unnecessary in addition to making financing deals using aluminium even more attractive.
“About 50 percent of the aluminium under LME warrants is linked to some sort of financing deal,” revealed a metals broking source. “At the moment lower rents would only work for aluminium.”
“Financing deals have been a feature of the market since 2008 because money was cheap,” explained an unnamed investor source. “For the LME it’s a trade-off.”