LME Warehousing

Matt Chamberlain Head of Business Development

Platts Aluminum Symposium 2014

LME Copper

1877

LME Tin

1877

LME Lead

1920

LME Zinc

1920

LME Aluminum

1978

LME Aluminium Alloy

1992

LME Nickel

1979

LMEX

2000

LME NASAAC

2002

LMEminis

2006

LME Steel Billet

2008 2010

LME Molybdenum

2010

LME Cobalt

Aluminum sits at the heart of the LME ecosystem…

Slide 2

...and represents our most traded contract 1.7bn tonnes of aluminum transacted in last twelve months

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Lots

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Tin, Lead, NASAAC, Al Alloy, Plastics, Steel, Minor metals, minis and LME Swaps

Nickel

Zinc

Copper

Aluminium

Slide 3

Market relevance demonstrated by stock levels… Significant inflow of stocks into LME warehouses

Slide 4

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Warehouse F Warehouse G Warehouse H Warehouse IWarehouse J Warehouse K Warehouse L Warehouse MWarehouse N Warehouse O Warehouse P

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Warehouse A Warehouse B Warehouse C Warehouse D Warehouse E

Operational queues

Structural queues

Key: Consultation announcement Decision announcement

…but stocks have given rise to queues…

Slide 5

Pre-consultation Internal LME review

Consultation Over 70 stakeholder meetings

33 written responses

LME Board Regulatory and legal review

Other proposed approaches

Full market engagement

…resulting in 2013’s comprehensive market consultation

1 July 2013

30 September

2013

7 November

2013

LME analysis Notice

25 October 2013

Merits of the Proposal

Unintended consequences

Implementation details

Economic analysis

Detailed report published

Slide 6

“Grandfather” existing metal If no more metal is loaded-in, then load-out rates do not change

Key principles of the Linked Load-In / Load-Out Rule (As revised following the Consultation)

Target warehouses with queues over 50 calendar days All other warehouses unaffected

Compromise between: • Metal users (provide a visible and predictable horizon) • Warehouse operators (some queues may always appear based on

warrantholders’ cancellation activity)

Link load-out to load-in If more metal is loaded-in, then more metal needs to be loaded-out

In the medium-term: • Stops queues growing • Shrinks queues

Slide 7

Load-out scenarios Load-out will always be greater than load-in

For warehouses with queues over 50 calendar days Example warehouse: current daily load-out requirement 3,000 tonnes

New rules, tonnes

Load-in 0 1,000 3,000 5,000

Minimum load-out 3,000 3,500 4,500 6,500

Excess load-out 3,000 2,500 1,500 1,500

W A R E H O U S E C H O I C E S P E C T R U M If warehouse logistically-constrained on delivery out – maintain current requirements

If warehouse flexible on delivery out – can load-in more

metal

Slide 8

A comprehensive warehouse reform package Detailed, practical and balanced set of measures

Enactment of the Proposal (with 50-day queue threshold) Warehouse data transparency

Enhanced LME investigation and punishment powers for abusive queues

Investigation of premium hedging and related solutions

Separate load-out rate for steel

Warehouse logistical review

Warehousing Agreement legal review

Best-practice information barrier policy

Commitment of Traders transparency

Creation of Physical Market Committee plus ongoing six-monthly reviews

Assess powers to limit rents in queues as a future policy option Powers for action over rents / FoTs

Slide 9

Value of LME

warrant

1. Economic background LME’s view of the relationship between queues and premiums

Market failure

“All-in” price inflation

Difficulty in price discovery

Difficulty in hedging

Slide 10

Brand discount

= Free market (“all-in”) metal price

—

— Location discount

— FoT charge

— Rent payable in queue

— Opportunity cost of waiting in queue

“Normal” discount

“Queue” discount

No evidence of: Valid market concerns:

Total discount

Economically a discount – but observed by the market as a premium

2. Queue threshold Key discussion point in the Consultation

LME has decided to set threshold at 50 days. Note: LME will have the power to take action against abusive queues even below 50 days

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What is the largest historical operational queue?

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Slide 11

Virtually no physical users in queues Danger of “operational” queues

being caught under a rule designed to address “structural” queues

Arguments for longer

Market of last resort – physical users should be able to access if required

Further reduces impact on premiums per economic analysis

Arguments for shorter

Second-order, but likely quicker, impact on premiums, given lower “incentive bid” from

warehouses Some shorter-term technical impact

possible from financing “bid”

Queues will fall over a period of years May rise first due to user cancellations – but will

eventually, mathematically, fall

3. Queue decay factor Impact on both queues and premiums

Queue impact Premium impact

0.5 decay factor retained (modelled on basis of current rents and FoTs) – but remains a key LME policy lever

Slide 12

Systemic self-discipline

Three lines of defence

Currently considerable user, regulatory and political scrutiny of the LME warehousing system

Any attempt by warehouses to increase their fees in the short term is likely to be viewed in an extremely negative light by key market stakeholders

Decision to maintain the 0.5 decay factor based on current rent and FoT levels

If charges were to increase (with impact on those in queues), valid for LME to compel quicker decay to alleviate impact on those in queues

Competition law continues to evolve

Appropriate that LME continually updates its advice in this respect

4. Rents and FoTs Impact on both queues and premiums

“Load-in and sell” warehousing model – metal owner loads-in metal, and immediately sells warrants on the LME

Warehouses compete not on low rates or strong service, but on incentive paid to the original metal owner

Incentive funded by charges on the buyer of the warrant

Warehousing market still competitive – but competes on incentives

Consequent impact on premiums per LME economic analysis

Both an existing market concern, and (if charges rise further) a potential unintended consequence of the Proposal

Use of the decay factor LME powers to cap

Slide 13

5. Warehouse ownership Existing best-practice information barriers

• Highly unlikely that LME could exercise powers to restrict warehouse ownership

• As such, appropriate response is to ensure validity of information barriers

• LME already requires and ensures best-practice information barriers

• Market engagement to communicate the key role of these protections to the LME system

Slide 14

6. Representation of physical metals community Enhanced engagement in the LME governance structure

• Physical users already key members of metals committees and User Committee

• However, clear market desire for a specific forum for physical market issues to be discussed

• Creation of Physical Market Committee, with representation on Warehousing Committee, User Committee and clear escalation route to the LME Board

Industry Non-industry

Slide 15

Split of LME metals committees members

(as of 25-Sep-13)

7. Other items considered in the Consultation All user feedback received full analysis and discussion

Slide 16

Other actions announced

Warehouse data transparency Commitment of Traders transparency Full physical network logistical review

Enhanced LME investigation and action powers against abusive queues

Investigation of premium hedging and related solutions

Separate load-out rate for steel Assess powers to limit rents in queues

as a future policy option

Unintended consequences considered

Logistical constraints Lack of warranting capacity

Warrantholder activity Alternative routes to build queues

Loss of metal from the LME network Complexity

Implementation details considered

Queue scheduling Rewarranting

Warrant creation scheduling Historical warehouse investment

Licensing criteria Enforcement

Other approaches considered

Quantitative load-out increase Per-shed load-out rates

Warrant fungibility Per-metal queues / warehouses

Physical user queue Ban incentives