London Metal Exchange rules on the amount of stock released each day are playing to the advantage of Glencore, which is moving thousands of tonnes of metal to warehouses in the Dutch port of Vlissingen, industry sources say.
Exchange regulations allow warehouse companies to release only a fraction of their inventories each day, much less than is regularly taken in for storage. Clients wait in queues to collect the metal, all the while paying rent to the warehouses.
A warehouse company owned by Glencore has been expanding its storage facilities in Vlissingen - a hub for storing aluminium, used in aircraft and cars. The metal is in chronic oversupply from a fundamental point of view but used heavily by banks and trade houses as collateral for financing deals.
Vlissingen, where Glencore unit Pacorini Metals owns 27 of 29 warehouses, is already holding nearly a million tonnes of aluminium, and the queue to take the metal out currently stands at around a year.
That backlog is expected to swell further, after a recent deal with UC RUSAL , the world's top aluminium maker, to supply Glencore with a total of 14.5 million tonnes of aluminium over seven years.
European traders said that several large orders for lead, used in batteries, seen in LME data this week are also en route to Vlissingen, where Pacorini is said to be offering producers an incentive or premium to put metals in its sheds.
"Fresh material is being bid slightly because Pacorini are paying big incentives to get metal there, in Vlissingen. Then they deliver it to the market and whoever holds it can't actually get it out for a year," said a London-based trader.
Glencore and Pacorini declined to comment. Warehousing practices are under scrutiny because not only do clients who want delivery of the metal have to endure a long wait, but they are also charged rent for each day their metal is stuck in a backlog.
The concerns voiced moved the London Metal Exchange, the world's leading metals market-place, to say it would remove Vlissingen as a registered delivery point for copper. However, aluminium, lead, nickel, tin and zinc can still be delivered there.
The LME declined to comment on the reason for delisting Vlissingen as a delivery point for copper.
However, it also said it is consulting on plans to ensure all LME-registered warehouses release a minimum 60 tonnes of nickel and tin a day, due to concerns metal was getting caught up in queues which was impacting the availability of material.
The backlogs have another effect. Because tied up metal reduces the material on hand for consumers, it helps keep premiums - the price paid on top of LME cash prices to take delivery of metal - robust.
"The LME are trying to pre-empt the metal getting stuck behind a queue," Societie Generale analyst Robin Bhar said.
"It just puts the whole LME/warehousing pricing mechanism more into disrepute. Generally customers are getting irate that it makes a mockery of the (LME as the) market of last resort," he added.
The game of warehousing chess is not new. Banks and commodity traders bought warehousing companies in the wake of the global financial crisis, with Goldman Sachs -owned Metro accused of building aluminium queues in Detroit.
Industry sources told Reuters that Glencore recently bought warrants or ownership titles for LME listed lead in Europe, and booked them for delivery with a view to moving the metal to its own warehouses in Vlissingen.
Once the metal arrives, the strategy is to offer the metal back to the market, meaning any LME trader who ends up with Vlissingen warrants would have to pay the Glencore unit rent.
LME data shows that in lead, cancelled warrants or material booked to leave warehouses have risen from around 11,000 tonnes early April to nearly 60,000 tonnes as of Wednesday, with some 18,850 tonnes booked to leave Bilbao, Spain, this week.
The numbers also show that since the start of this year, copper, nickel and lead stocks have been slowly creeping up in Vlissingen, but very little material has so far been booked for delivery.
"The key point is these (warrant cancellations) are not related to underlying demand, it's to do with material being moved between warehouses for non-industrial reasons," said Guy Wolf, a macro strategist at Marex Spectron.
Another source said: "Given the lead market is and will be in surplus for a few years, I can't imagine (the warrant cancellations) are going to consumption. It looks like a warehousing arrangement."
LME rules mandate that companies who stock more than 900,000 tonnes of metal in a single location must release a minimum 3,000 tonnes of metal per day as of April 1.
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