The London Metal Exchange (LME) is initiating a market-wide consultation proposing to control escalating warehousing costs by imposing caps on maximum charges.
If enacted, the first capped charges would come into effect on 1 April 2017.
“The metals industry has expressed concerns over the headline rates charged by LME-registered warehouse operators. After conducting an extensive discussion process, the LME believes that a fair and straightforward approach to this very complex issue would be to cap these maximum rates and to impose a medium-term freeze on increases,” says Matthew Chamberlain, Head of Business Development.
The LME proposes to set the initial schedule of maximum rates for warehouse rents and free-on-truck (FOT) charges by calculating the average of the highest published charges for the years 2015-16 and 2016-17, on a per-metal and per-country basis. This schedule of charge caps would be frozen for five years, during which time “real-world” prices are expected to converge closer to the frozen published rates. After that, the maximum prices would be updated annually based on the per-country consumer price index.
“The LME is committed to the physical market, and we have devoted substantial time and resources to address these serious concerns over warehouse charges. The result is the simple solution we are proposing today, which we believe will bring clarity and stability to the industry, with minimal market disruption,” says Garry Jones, LME Chief Executive.
The consultation document also outlines a proposed process to set caps for new countries or contracts added to the LME network, and an appeal procedure for warehouse operators to accommodate material changes in their economic circumstances.
The caps will apply to the maximum or headline rates. Warehouse operators will still be free to charge less than the cap in each country.
The consultation will be open until 19 August 2016. The LME hopes to publish its conclusions by 30 September 2016, and aims for any revised policy to take effect following the 90-day notice period required under the LME Warehouse Agreement, that is, by 29 December 2016, in time for publication of the 2017-18 charges.