Metro International Trade Services — the dominant London Metal Exchange warehouse operator in Detroit but also with depots across the US, Italy, South Korea and Malaysia — was ever the stand out contrarian operator.
Indeed, it was the fabulous profits the firm was generating that encouraged Goldman Sachs to buy the company in 2010, and it was the prospect of lower profits and regulatory oversight that probably prompted them to sell in 2014 to Swiss-based but British-owned investment house Reuben Brothers.
Metro and Pacorini’s Load-Out Game
It’s probably not unfair to say Metro, along with Glencore’s Paccorini, were the black sheep of the warehousing family in the years following the financial crisis, as they engineered massive load out queues, lasting up to two years, in order to generate vast rent profits from metal stuck waiting in the queue to be loaded out.
Aluminum ingots, possibly waiting at a Metro International warehouse for load out.
Consumers and processors put up with that for a while, but under threat of legal action the LME moved to tackle the problem in recent years and a number of rule changes have effectively forced warehouse firms to limit intake when queues are over a certain length. Increase load out rates and changes this year will force firms to reduce rent on metal in the load out queues.
Open and Transparent Warehousing
As a result, the warehouse business has been forced to operate on a more fair and open basis, charging rents on a competitive basis against other LME warehouses without the benefit of being able to offer massive incentives, in the form of secret discounts or up-front payments, to encourage firms to store metal in their sheds.
The LME’s rule changes were expected to cause rents to rise, storing metal in a highly regulated and secure LME warehouse has costs (and benefits) attached that non-LME warehouse storage does not incur.
Forcing LME warehouses to operate without these distorting incentives was always likely to incur an increase in rents, but according to Reuters the market has been taken by surprise this week when Metro announced their 2016/17 rent and Free on Truck (FOT) delivery charges for aluminum at levels way above those of any other LME warehouse company.
Metro will charge $0.72 per metric ton per day to store aluminum in its sheds from April 1, up from $0.54 currently. The company has also raised its FOT charges in the US to $55.55 per metric ton from $39.95. By way of comparison, the average 2016/2017 rent charge for aluminum among competing operators of LME warehouses in Detroit is $0.535 per metric ton per day, up from $0.4683 in 2015/2016. The average FOT charge from competing operators will be $43.99 per mt, from $40.02 in 2015/2016.
The LME has been typically understated in its response to the news, saying it has queried the economic rationale for the increases submitted, but behind the scenes must be demanding an explanation for such dramatic increases. The average of all warehouse rents for aluminum from April will be near 50 cents, and the LME has suggested it may consider rent capping but it’s unclear if it would run into legal challenges if it tried that route to resolve the situation.
Metro’s Hand… Not All Trump Cards
Metro may be the dominant LME warehouse operator in Detroit, its home base, but it is not the only one. There are four others holding aluminum, but Metro has 90% of the city’s LME aluminum stock.
How much longer it will hold such a dominant position remains to be seen though, the firm can’t even make significant money out of the 200,00+ mt of metal sitting in its load-out queue. New rules such as queue-based rent capping due to be introduced by the LME in May mean the rent payable on metal stuck in a queue for longer than 30 days drops by half and is eliminated altogether after 50 days.
Metro may find that it hemorrhages stock as customers switch to other operators. Or, more likely, this may be just be a negotiating stance and it fully expects to “respond to market pressure” and reduce the planned increases to something close to the industry norm, but achieve better than the average without having to fight a legal case.
Metro International is Up to No Good in Aluminum Warehousing Again