COLUMN-LME warehousing landscape adjusts to life after queues: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Aug 14 (Reuters) - You don't hear so much about the load-out queues in the London Metal Exchange's (LME) warehouse system these days.

It's not that the queues to take delivery of aluminium from Detroit and Vlissingen have disappeared.

As of the end of last month the waiting time at Detroit was still 328 days and that at the Dutch port 327 days.

But it does seem that the LME, stung by fierce criticism from its manufacturing users and pressured by regulators on both sides of the Atlantic (Shanghai: 600558.SS - news) , has finally found the right combination of measures to get the queues under control.

Both aluminium queues have been steadily falling over the last few months and the exchange's many critics have been assuaged by its prognosis that a new raft of rule changes will cause waiting times to fall below the targeted 50-day threshold around May next year.

The landscape of the LME's warehousing system is already starting to change in anticipation of a post-queue environment.

The number of warehousing units has been falling. There are currently 621 (excluding steel storage compounds), which is the lowest tally in at least five years.

That's a simple reflection of the amount of metal that is being forced out of the delivery system by the exchange's targeting of the queues. Total (Swiss: FP.SW - news) registered base metals tonnage has fallen from a peak of 7.6 million tonnes in mid-2013 to a current 4.8 million tonnes.

The composition of warehouse operators is changing fast too with some of the bigger players drastically reducing their foot-print while new companies move in to try and take advantage.

This is still an evolving process.

So far at least, the dominant warehouse operator, Pacorini Metals, owned by physical trading powerhouse Glencore (Xetra: A1JAGV - news) , remains defiantly dominant.

******************************************************* Graphic on LME warehouse units vs tonnage stored: http://link.reuters.com/bug45w Major changes in LME warehouse units by operator: http://link.reuters.com/gug45w *******************************************************

OUT WITH THE OLD...

The original queue was the brain-child of Metro (Dusseldorf: 62M.DU - news) International, which at one stage had a near monopoly on LME storage in the city of Detroit.

Detroit was inundated with aluminium after the Global Financial Crisis but the flood of arrivals turned to a trickle of departures when stocks financiers wanted to move large tonnages to cheaper off-exchange storage.

Metro (Other OTC: MTRAF - news) 's strategy, exploiting outdated and inefficient LME load-out rules, was finessed by Goldman Sachs (NYSE: GS-PB - news) when it bought the operator in 2010.

Goldman has now departed, selling Metro to the Reuben brothers, and the Detroit aluminium mountain has been whittled down to a foot-hill.

Metro's LME warehousing operations have subsequently been much reduced. It now operates 66 units, compared with 93 a year ago and 105 in 2013, having all but left locations such as New (KOSDAQ: 160550.KQ - news) Orleans and Port Klang in Malaysia.

Not that it's quietly slunk off into the twilight zone of the Reubens' property development portfolio. It remains an LME warehousing force to be reckoned with.

The LME's July report detailing stocks storage by operator showed Metro warehouses in the South Korean port of Busan receiving 73,725 tonnes of metal last month, confirmation that it was the prime beneficiary of the mass raid on LME lead stocks earlier this year.

An even more dramatic retreat from the LME storage business has been effected by Impala Terminals, owned by commodities house Trafigura.

After a failed attempt to recreate Metro's queue model at Antwerp, the number of Impala sheds has shrunk from 41 two years ago to just nine.

Henry Bath, sold last year by JP Morgan to Mercuria, was never in the queue game but it too has slimmed down dramatically, cutting the number of registered storage units by 21 to 49 over the last 12 months.

...IN WITH THE...ER...OLD

As such big names withdraw, others are beefing up their LME storage presence.

Worldwide Warehouse Solutions (WWS), the logistics arm of trade house Noble Group (Dusseldorf: N2X.DU - news) , has been steadily building out its presence. It now operates 24 units, up from 13 two years ago.

After first muscling into Metro's home turf in Detroit, it has broken into Pacorini's Fortress Vlissingen, where it now operates seven sheds and as of last month was storing 37,118 tonnes, much of it also lead thanks to the same stocks swoop that benefited Metro in Busan.

BTG Pactual, part of the Brazilian investment bank, is another player on the up, adding 10 units, nine of them in Rotterdam, over the last year.

But perhaps the two most interesting arrivals are a couple of old LME warehouse faces.

After selling its LME warehousing business to Glencore back in 2010, the original Pacorini group has returned to the LME fray, opening 11 units over the last year.

Now (NYSE: DNOW - news) trading as B. Pacorini SRL, and not to be confused with Pacorini Metals, it has established a presence in all three major geographic regions; Antwerp and Spain in Europe, Busan and Gwangyang in Asia, and Mobile and New Orleans in the U.S (Other OTC: UBGXF - news) .

Meanwhile, the face behind the original Metro, Bill Whelan, has also been quietly expanding his new outfit, ISTIM Metals.

ISTIM now operates two units in Detroit and over the last 12 months has opened another five in New Orleans.

******************************************************* Share (LSE: SHRE.L - news) of LME storage units by major operator: http://link.reuters.com/fug45w Share of LME-registered stocks by major operator: http://link.reuters.com/zeg45w *******************************************************

STILL DOMINANT

Two players, however, still occupy the commanding heights of LME storage.

C. Steinweg, the granddaddy of LME warehousing, still operates more units than any other player. There has been considerable chopping and changing to its portfolio over the last couple of years but the net impact is that it has lifted the number of registered units by 12 to a current 179.

Steinweg may have more sheds than Pacorini Metal's 159 but the latter has more metal.

As of the end of last month Pacorini Metals was storing 56 percent of all the metal in the LME's global delivery system, including 1.74 million tonnes, most of it aluminium, at Vlissingen.

Indeed, the big four, Pacorini Metals, Steinweg, Metro and Henry Bath, hold around 94 percent of all registered metal.

Others are whittling away at that dominance and even small players such as Independent Commodities Logistics, based in the Dutch port of Moerdijk, now hold warranted metal, albeit a fairly negligible 3,064 tonnes at the end of last month.

AFTER THE QUEUES

But the real competition is almost certainly taking place away from the headline LME stocks arena.

Between them Metro and Pacorini Metals are loading out huge amounts of aluminium to comply with the LME's queue-decay rules. A total 157,405 tonnes left their combined sheds in Detroit and Vlissingen last month.

Now that the LME has stopped the merry-go-round games, where metal was loaded out, shifted off warrant at the same location and then re-warranted, that's a lot of metal in search of a new storage home.

Old faces such as the Pacorini Group and ISTIM have evidently seen this opportunity and are likely feasting on this demand for cheaper off-exchange warehousing.

At one level the growing number of operators will be welcome news for the LME, which wants to make its network more competitive, particularly in terms of extremely high storage and load-out charges relative to non-exchange tariffs.

But the way things are currently evolving, with registered stocks draining away to cheaper storage and competition happening in the non-exchange space, also poses some hard longer-term questions.

There's always been concern that a side-effect of the LME's multi-pronged attack on its load-out queues would be a diminution of the exchange's physical function with a greater proportion of metal stocks held in non-visible storage.

Right now, those concerns look justified.

However, after slaying its queue monster, the LME has set its sights on those high exchange storage costs with an implicit aim somehow to narrow the differential.

If it can break the dominance of the big players, Pacorini Metals in particular, there will evidently be no shortage of smaller operators ready to take the off-market battle into the on-market arena.

That's still a big if, though, despite all the signs that the broader metal warehousing landscape is starting to adapt to life after the queues.

(Editing by Susan Thomas)