Singapore, 12 February 2010

Rises in maximum rents of up to 6 percent and an increase in the cost of removing metal from London Metal Exchange-Registered warehouses could trigger a rush to clear material before the fees take effect on April 1.

The increased cost of storage may make it more difficult to earn a profit from the contango -- where owners of metal more than cover the cost of storage, insurance and interest by buying cash metal, storing it, and selling it three months forward at a premium.

There is a mountain of metal sitting in LME warehouses. Combined base metal inventories have risen more than five-fold since the start of 2008, and are near a record of more than 6 million tonnes. The bulk of that is 4.56 million tonnes of aluminium, or enough material to replicate the Great Pyramid at Giza.

"One of the appeals of the LME has been full contango financing in metals like aluminium. Rent rises could change that dynamic and cause some pain," ANZ's senior commodities analyst Mark Pervan said.

"Interest rates are low and look to remain that way in the medium term, but the main cost -- storage -- seems to be rising and if the forward curve isn't sufficient to finance, metal will move out," Pervan said.

Outflows of aluminium have also accelerated in the past few weeks and cancelled warrants -- metal earmarked for delivery -- have risen sharply.

In copper, stocks have fallen five times in the past seven sessions, with the three session fall at the start of the month the longest sustained downtrend since July last year.

According to Reuters calculations based on data on the exchange website ( www.lme.com ), maximum rents for storing metal in an LME monitored warehouse will rise by an average of 4.9 percent, while delivery charges will go up by an average of 2.7 percent.

[To download a spreadsheet with LME rents from 2004 to 2010 see excel file below]

Although the LME monitors and approves warehouses, it does not set fees and charges. Those are set by the warehouse companies, which include C. Steinweg, Pacorini, Metro and Henry Bath, part of RBS Sempra. Henry Bath declined to comment and other warehousing company officials were not immediately available.

Since 2004, LME rents across the six main contracts have risen by 59.9 percent, Reuters calculations show. Rent for tin storage has increased by 78.7 percent, while copper rents rose the least -- 48.5 percent in the period.

The rises, far outstripping global inflation rates pegged at 1.4 percent last year and seen around 2 percent in 2010, worry some traders.

"In the short term there is a very real risk that people will try to pull material out of storage in order to beat the higher fees," a Singapore-based trading source said.

"Rising cancelled warrant and outflows of material resulting from that may distort demand perceptions in the next few weeks. In the longer term it increases the risk that metal will flow back into the market." The greatest potential may be in aluminium, where a large proportion of the 4.6 million tonnes of metal in warehouses is locked up in financing deals.

Currently, the discount or contango for cash aluminium versus the three-month contract is around $32 a tonne. The contango on a 12-month basis is a little over $100.

Based on the new fees, the average cost of storing metal could be nearer $37 over three months and more than $140 over a year. "This would imply we need a bigger contango to keep stocks in warehouses. Many of the longer term financing contracts expire late in the second quarter or early in the third. Will they be renewed?" the Singapore trading source said.

"It not only depends on the rents -- interest rates and physical premiums will also determine whether the metal stays or goes." Traders said stockholders in the United States were looking for ways to store material at around one-tenth the cost of keeping metal in LME warehouses in empty storage facilities owned by automakers.

But stockholders looking to pull material out quickly may have trouble. Traders said warehousing companies were offering to move in and warrant 2,000 to 4,000 tonnes of metal on a daily basis, but outbound delivery rates were quoted closer to 500 to 600 tonnes per day.

The LME mandates that warehouse companies are able to deliver a minimum of 1,500 tonnes of metal per warehouse per day.

Discounts Available

Major players often get discounts from the maximum rent so they may still be able to turn a profit, while non-LME approved storage options mean the chance of a huge amount of material coming onto the market are limited.

"There are so many discount deals out there and people are already pulling metal out of LME and finding cheaper places to store it," a trader in Sydney said.

"I don't think it will mean all that aluminium tied up in financing will flood onto the market. You can store the stuff anywhere -- on the tundra in Siberia or out by Alice Springs. People will continue to find ways to store metal cheaply enough to finance profitably."

Ends --

By Nick Trevethan, Reuters - For Commodities Now

Download LME Rents, 2004 - 2010 here:

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LME Rents, 2004-2010

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