Brazil's BTG plans first LME warehouse in Owensboro, Ky.

By Josephine Mason

Jan 31 (Reuters) - Brazil's largest independent investment bank, Grupo BTG Pactual SA and Pacorini Metals, owned by Glencore Xstrata PLC (Other OTC: GLCNF - news) , will run the London Metal Exchange's latest U.S. warehousing facility, the port operator told Reuters on Friday.

Owensboro Riverport Authority in Kentucky has chosen the two firms to lease and operate sheds with an initial capacity for about 120,000 tonnes of aluminum, the port's Chief Executive Brian Wright said.

The port has room to store more metal if needed, he said.

Both companies will now apply to the LME for go ahead to store metal within its network. The exchange approved Owensboro, an inland U.S. port, as a new storage location in November.

This will be BTG (Other OTC: BTGGF - news) 's first warehouse registered with the world's oldest and biggest metal market and comes six months after the bank hired Shon Loth to set up a metals storage business.

The move is the latest sign that the Sao Paulo-headquartered bank aims to build up a global physical commodities trading and storage business on its own rather than through acquisition. It is controlled by billionaire financier André Esteves.

Last year, the bank was interested in buying JPMorgan Chase (Xetra: CMC.DE - news) & Co's physical commodities business including the Henry Bath warehousing unit, which was put up for sale last summer.

It has pulled out, leaving Blackstone Group, Macquarie Group and Mercuria in the running.

Owensboro will expand Pacorini's footprint. It is the second-largest LME-registered warehouse company with well over 100 sheds in Europe, Asia and the United States.

Its biggest presence is in Vlissingen, the Netherlands, where the firm owns 55 out of the 60 sheds approved which hold some 40 percent of the 5.4 million tonnes of aluminum in the exchange's system.

CRITICAL TIME

The move comes at a critical time for physical commodity traders as U.S. banks exit the business amid unprecedented regulatory scrutiny of their activities in physical commodity markets and razor-thin margins.

Foreign banks like BTG are able to avoid the regulatory glare that has pushed JPMorgan to sell one of the industry's biggest physical books.

Adding Owensboro to its vast network comes as the LME overhauls its warehousing policy amid complaints that games by warehousing firms owned by merchants and banks have disrupted supplies and inflated prices of critical metals.

Merchants, including Trafigura and Noble (NYSE: NE - news) , and Wall Street banks rushed to enter the warehousing business about three years ago, aiming to secure access to low-cost storage for their physical dealing and earn big profits on rent from big stocks of metal that piled up during the global economic crisis.

Storage firms now make big profits from financing deals, in which traders or investors store metal for years at a time.

With low interest rates and a wide forward price structure, investors make money by selling the metal forward and keeping it locked up in the meantime.

The LME's new stricter rules may limit warehouses' LME-related income, but many firms are also making money by storing millions of tonnes of aluminum outside of the exchange.