London, 1 September 2011: Reuters

Commodities heavyweight Barclays Capital has bought a stake in a small metals warehouse, a source said, as the bank scrambles to catch up with rivals by securing a foothold in the profitable storage business.

The UK bank, a major player among commodity investors but not as large in the physical markets, has bought into UK-based Erus Metals Ltd, a little-known metals firm seeking approval to join the network of warehouses monitored by the London Metal Exchange's ( LME), a source with knowledge of the matter told Reuters.

Another source said British steel and iron ore trader Metalloyd is also understood to have taken a stake in Erus, which is expected to get LME registration by mid-September. Financial details of the deals were not available. The deal gives Barclays an entry point to the business of storing base metals like steel, copper and zinc for a fee, following the likes of Goldman Sachs, JP Morgan and Glencore in consolidating an industry that was almost wholly independent just two years ago.

"It certainly makes sense for companies involved in trading and financing metals to buy warehouses so that they can control one element of their cost structure," Macquarie head of commodities Jim Lennon said.

The lone remaining major independently owned warehouse, Rotterdam-based C. Steinweg, has vowed to remain so, giving Barclays few options for getting into an industry that has generated as much ire as revenue lately. This trend has been criticised by some metals traders who fear a conflict of interests despite so called "Chinese walls" that companies implement as safeguards.

Barclays Capital, the investment banking arm of Barclays PLC , declined to comment. Erus Metals was not available for comment. Metalloyd declined to comment. The LME said it does not comment on warehousing approvals because they are confidential.

RUSH FOR STORAGE

Wall Street commodity desks are investing more money and time than ever in building up their physical metals business as banks and hedge funds look for ways to make money outside of derivative markets facing regulatory reforms.

Companies have been diversifying into warehousing in the wake of the economic downturn because the industry typically performs well in a recession, when there is less need for metal but money can be made from payments for their storage.

"It's a natural hedge against downward commodity markets movements," said a UK-based metals trader. "When markets go down metals stocks go up and renting income increase," he added.

JP Morgan bought warehouser Henry Bath last February, after Goldman Sachs bought U.S. based Metro. Traders Trafigura, Noble Group and Glencore , have since all taken charge of their own warehousing units. "Chinese walls are theoretically in place, but I think there is a bit of conflict of interests," said analyst Ed Meir at MF Global.

"Who determines whose metals goes in or out first? There have been complaints about delays in metals delivery, but nothing has been done yet. It's a bit of a grey area in terms of regulators."

The London-based exchange, the world's biggest marketplace for industrial metals such as copper and aluminium, oversees a global network of privately-owned warehouses where such metals are stored, partly for potential delivery against its contracts.

Last month, Singapore-based logistics group CWT said it would acquire 73.81 percent of MRI Trading, set up by Mark Rich, who founded Glencore.

Ends --

Reuters - for Commodities Now.