Approving locations for LME warehouses

Features

All London Metal Exchange (LME) warehouse locations have to undergo an intensive investigation to ensure that they meet the LM E's exacting criteria before being approved as good delivery points. Listed warehouse companies are independently owned, and only substantial companies are considered for approval. Stringent capital and insurance requirements must be in place, and companies must sign a binding agreement with the Exchange. The warehouses that are put forward for listing are also inspected by LME's staff to ensure that they are sound and secure and meet LME's logistical requirements.

For the best indicator of general LME policy when approving locations for warehouses, refer to the official criteria as laid down by the LME operations department The following are taken directly from official notices of LME:

* For any particular LME contract metal to be deliverable therein, the location should be an area of net consumption and away from adjacent areas of production for that particular metal.

* The delivery point should already be-or genuinely believed to be capable of becoming-a natural, logistically sound conduit for the passage of metal on to eventual consumption points.

* The location should be considered safe, wellmanaged, politically and economically stable, commercially sensible, fiscally appropriate, legally sound, and not subject to corruption.

It is obviously unfair to locate warehouses close to an area of production, as this, over a period of time, could lead to dumping of the metal by producers, which would result in unnecessary downward pressure on prices.

While dumping is clearly a self-defeating activity in the long term, easy access to a warehouse location for one producer over others could create a strong temptation to get there first Of course, excess production, especially in times of recession, will find its way into warehouses, but it should not be made too easy. Also, it is fair to say that, in most market conditions, metal tends to be consumed in areas distant to those where it is produced. The policy of warehouses in areas of consumption, therefore, makes good sense. This is especially so today, when consumers rely more and more on just-in-time deliveries rather than holding inventories. It also means that an element of delivery cost is included in the LME price.

Just-in-Time Delivery

Finally, the LME does not wish to replace the normal transition of metal from producer to fabricator, which is fundamental to the physical market Rather, it is a lastresort delivery mechanism. This is important in terms of price. The fact that the LME is used as a last-resort delivery point combined with the buyers' trend towards just-in-time deliveries, are two more good reasons why this metal should be stored nearby.

The Exchange is committed to its responsibility to provide a fair and representative pricing mechanism. Consequently, there is a wish to have as broad a base of locations as possible, hence, the LME continually considers new locations.

Why does the LME approve warehouses at all? Throughout its history, the LME has always been a tradebased market and the fact that its contracts are based on tangible deliveries, of a quality most user-friendly to the trade, cements that link. However, it is obviously not optimal to make the delivery option too, as it is not the LME's aim to supplant the physical market by becoming a more attractive delivery option than is provided by the natural structure of the physical market. So, LME warehouses provide a last-resort supply alternative where industry can take supplies when the physical market is tight, or even short.

In times of recession, industry uses the warehouses to deliver excess stocks and, through the mechanism of the market, passes to someone else (a bank, for example) the cost of financing the material. The last resort factor means that the LME provides an extremely sensitive indicator of the state of the metals industry, which is why the published daily stocks figures play such an important part in the market pricing mechanism. The wide range of warehouse locations adds benefit to this service, as the stock reports also indicate differences in supply and demand by area and shape. This further aids the pricing of premiums in the warrant market

Listing Criteria

The decision to list a warehouse also is subject to stringent criteria. The warehouse company will be asked to supply certain information about its structure and financial standing, in order to demonstrate its competency as a warehouse organization.

General information about the applicant company is needed. This is straightforward information on the company, covering such things as when it was established, registered address, type of company, list of directors, number of staff, etc. It will also need to provide a set of its most recently published accounts. Currently, the capital adequacy of a company must be a least L500,000.

Shed Standards

When listing a shed, the warehouse company must submit to the LME information on the materials used in the shed's construction, including the size of the building; the number of floors, doors, and windows and all their sizes; boundary fencing and gates; floor loading capability; and security. An outline of its facilities also is required, which lists such things as type of weighing equipment; the controlling authority and frequency of controls; types of strapping machines; the number of cranes and forklift trucks on site and their lift capacities.