LME warehouse queue returns after jump in aluminum orders

Aluminum ingots. Credit: LME

Two huge requests to withdraw aluminum from London Metal Exchange stockpiles have confronted the exchange with the return of an old enemy: the warehouse queue.

Orders to deliver out aluminum at LME warehouses jumped by 183,975 tons on Thursday, after a 100,325 ton increase the previous day. Almost all of that was in Port Klang, Malaysia, where 352,875 tons is now waiting to be delivered out.

The cancellations come after more than 600,000 tons of aluminum was delivered into Port Klang in the past week. Trafigura Group was the key player behind the deliveries, Bloomberg has reported.

The issue of long wait times to get metal out of its warehouse network has been a headache for the LME for years.

While large quantities of metal can be placed on warrant overnight, warehouses are only compelled to deliver out a few thousand tons each day, meaning that long queues can form.

Traders delivering metal often strike “rent share” deals with warehousing companies, under which they split the rent paid by whoever buys it. That means the longer the metal stays in the warehouse, the more money they stand to make.

A decade ago, the games played by traders, banks and warehouses to maximize their revenues by keeping metal stuck in long queues drew fire from US regulators and consumers. That prompted the LME to introduce a series of new rules to clamp down on the behavior and limit how much money warehouses can make once a queue has formed.

While queues have occasionally flared up in the years since, they have eventually disappeared as metal was delivered out over time.

“The LME has a comprehensive set of rules around queues, including a specific provision which caps the amount of rent which can be charged in a queue,” an LME spokesperson said on Thursday. “This has been designed to disincentivize the build-up of queues, including rent shares around any such queues.”

(By Jack Farchy)


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