The queue to withdraw aluminium from the Istim warehouse at Port Klang is dividing market participants. Some feel that the 251-day wait is a sign that the LME rules are not working, while others blame traders and Istim itself for the situation.
Excessive warehouse queues are not a new problem for the LME. In 2011, it increased the minimum daily load-out rate from 1,500 tonnes per day (tpd) to as much as 3,000 tpd depending on the size of the warehouse.
Further rule changes were introduced in 2013 to counter the persistent problem.
That regulation, which forced warehouse companies to deliver-out more metal than they load-in, at locations where the queue to withdraw metal was 100 days or more, was followed by a comprehensive warehouse reform.
That led to the introduction of queue-based rent capping rules (QBRC) in 2019. QBRC has undergone various changes but the current iteration, which has been in force since November 1, 2020, means that metal is not subject to warehouse rent if it has been in a queue for more than 80 days.
The idea was to remove any incentive by warehouses to have material held in queues for longer than 80 days. Yet some participants feel the LME rules may be making queues worse.
“Metal owners [for example, traders] who choose to cancel their metal for delivery create the queue,” one warehouse source said. “They cancel metal to take advantage of free rent, and that plays a role in elongating the queue.”
The warehouse operator also pointed at the LME rule itself: “QBRC could be playing a role and exacerbating the problem,” he said.
A market source, who works for a trader with ties to the warehouse business, also believes that QBRC creates longer queues. “In the recent situations we have seen, where metal has been dropped, large queues have formed,” the source said.
In the case of Port Klang, a 652,525 tonne inflow of aluminium in May 2024 created a large stockpile of metal that traders immediately began to cancel. “In my opinion [the queues are] all about QBRC, because picking up free rent is always ‘back of mind’,” the trader said.
Unsurprisingly, the LME disagrees. “The LME has a comprehensive set of rules around queues, including a specific provision which caps the amount of rent which can be charged in a queue,” an LME spokesperson said. ”This has been designed to disincentivize the build-up of queues.”
Not all traders are against QBRC. “I definitely do not think it creates bigger queues,” a second trader said. “The ability for LME warehouses to attract big volumes is essentially destroyed by QBRC. The LME absolutely sledgehammered it.”
Because big volumes are less likely, the second trader estimates that queues like the current one at Port Klang will only happen “once every five years.”
Stock volumes on the LME have fallen significantly over the past 10 years. In September 2024, the average daily closing stock total of metal in LME warehouses was 1,691,524 tonnes. That is down by 72.75% since September 2014, when it was 6,207,155 tonnes.
Over the same period, several warehouse operators have reduced their involvement in the LME’s storage network. Analysis of LME data reveals that Henry Bath, Pacorini and Access World have all cut their tonnage, with Istim now accounting for almost half of total LME stocks.
Sources told Fastmarkets that most warehouses prefer to focus on value-added logistics services, which is more profitable and subject to less regulatory scrutiny than holding LME metal.
Amid the debate, some market participants are calling for the LME to amend its warehouse regulation.
“I think the LME should reform the current rules, because it was never set in stone and was always supposed to be a phased approach, open to feedback,” the first trader said. “Over the past year, it has been shown that QBRC is being abused by people getting free rent.”
The LME has not ruled out a further amendment to the rules, telling Fastmarkets that “the LME keeps its warehousing rule sets under review.”
Yet some participants blame Istim for finding loopholes in the rules. In September, the warehousing firm increased the cost of re-warranting metal to $50 per tonne. That was subsequently lowered by the company to $27.50, which is still above the typical fee of $5 to $10.
Some market participants feel that the extra charge added to waiting times, because it disincentivized traders from removing their metal from the queue and re-warranting in Port Klang.
Istim has not technically broken any rule because the re-warranting fee is not regulated by the LME but is negotiated bilaterally between the metal owner and the warehouse operator. It does benefit from re-warranting since it brings back metal into paid-rent status.
“Istim Metals publishes a re-warranting fee on its website to provide transparency to its customers,” Istim chief executive officer Michael Whelan said.
“The published fee is a maximum fee. It is always open to negotiation, in line with Istim’s commitment to finding solutions to allow metal owners to use the LME warehouse system as efficiently as possible, while preserving Istim’s commercial position,” he added.
“If owners of metal choose to cancel metal and take delivery, which they do at their own discretion, we assist them with joining the queue and delivering their cancelled metal out,” Whelan said. “Further, although Istim Metals is not obligated to re-warrant cancelled metal, it will always endeavor to do so.”
The first trader agrees. “I wouldn’t think there is any reason why [Istim] would amend their re-warranting fee,” the trader said. “It is and always has been a negotiation. It’s the same thing with rent. Fees are open for discussion.”
A third trader also feels the re-warranting fee was a negotiating ploy. “I think it was clear that Istim was there to do deals, because they reduced it straight away to $28,” he said. “I would argue that Istim was just securing more rent deals.”
The LME does not set warehouse fees but it does have the power to intervene if market participants complain about the issue.
“Clause 9.3.1 (ii) of the LME’s warehouse agreement specifically prohibits warehouses imposing unreasonable charges for depositing metal,” the LME spokesperson said. “The LME would investigate any concerns of this nature which are brought to its attention”.
The queue has shortened from its peak of 293 days in August. But while it remains, the debate about the LME warehousing system will continue.
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