The London Metal Exchange plans to publish a discussion paper mid-March to look at the possibility of capping rent and free-on-truck charges at LME-listed warehouse, the exchange said Monday.
Earlier this month, the LME gave warehouse operators an opportunity to reduce their proposed rent and FOT charges for the 2016-17 year (April 1, 2016 through March 31, 2017) before the new rates take effect April 1.
That followed initial submissions by warehouse operators in December, when the LME noted the stock-weighted average increases for both rents and FOTs were significantly higher than in respect of the previous two annual cycles -- being 10% for rents (compared with 3% in both 2015-16 and 2014-15) and 12% for FOTs (compared with 2% in 2015-16, and 2% the previous year).
The window for submissions was reopened from February 5-19, during which "the LME is pleased that two of its warehouse operators took the opportunity to revise downwards their rent and FOT charges for the 2016?2017 cycle", the exchange said Monday in a notice to members.
"In particular, in many locations, this has resulted in a significant reduction in the maximum charges observed in that location -- which in the view of the LME, will reduce the negative impact of such charges on the market," it said.
Despite the reductions, however, "the LME is disappointed to note that the stock-weighted average increases are still considerably higher than in the previous rent cycles, being 7% for rents (compared to 3% last year, and 3% in the prior year) and 9% for FOTs (compared to 2% last year, and 2% in the prior year)," the exchange said.
The LME said its decision to reopen the window for proposed rent and FOT rate submissions this year was a one-off event.
"The LME does not intend to repeat this process should the problem arise in future years, both due to the market uncertainty engendered by such a process, but additionally because this solution does not address the underlying problem -- namely that the market will remain susceptible to this issue while the LME does not have the power to limit the rent and FOT rates submitted by warehouse operators," it said.
The LME "has no reason to assume that, in the absence of any substantial change, the market will not encounter the same, or a similar problem, during the next and/or future rate setting cycles," it said.
As such, the LME "is proposing, at a minimum, to explore the possibilities for implementing a longer-term solution to high charges," the exchange said, adding: "To this end, the LME is minded to publish to the market a Discussion Paper outlining its options in respect of the implementation of powers to cap rent and FOTs to be published in mid-March."
To support its mechanism of physical delivery the LME approves and licenses a network of warehouses and storage facilities, currently running to more than 700 LME-approved warehouses and storage facilities in about 40 locations across Asia, Europe and the US.
It does not, however, own the warehouses or the metal stored in them.
Last November, the LME said it would go ahead with plans to introduce a cap on the rent that can be charged by an LME-approved warehouse for metal held in a delivery queue, and an increased minimum load-out rate for metal stored in LME warehouses.
The increase in the standard load-out rate is expected be implemented March 1, with queue-based rent capping to come into effect on May 1.
