ANALYSIS-Big newcomers force metal warehousers to adapt or quit

* Banks, traders have bought warehouse firms in last 3 years

* Newcomers reap rental profits as queues for metal grow

* Traditional firms struggle to compete in "non-service" game

LONDON/NEW YORK, Jan 16 (Reuters) - Old-style warehouse firms are coming to accept that big traders and banks, muscling in on storage of metals like aluminium, may have changed it forever into a financial business from a service to manufacturers.

Some say they may have to either quit the fight or adopt the newcomers' tactics, which include making rental profits by letting long queues for metal grow at some warehouses, rather than produce it from storage promptly when buyers need it.

The firms operate sheds at ports in various countries where end-users can in theory pick up purchases made through futures trading on the London Metal Exchange (LME), the world's biggest marketplace for industrial metals.

The banks and commodity traders that have bought control of a number of warehousing companies over the last three years have found that backlogs are lucrative because metal waiting to be delivered out of sheds continues to earn them storage fees.

At the same time, the newcomers pay big incentives to producers to store metal in their sheds, sucking material away from traditional firms that often cannot afford the premiums.

"A warehouser who doesn't play this non-service game cannot compete in the market," said one source in the industry.

"We have a reputation as a service provider. We live off the fact that we do deliver, it could even be our motto. But I'm not sure I want to put that on paper because tomorrow it might get so bad that we need to play this game ourselves. I hope we won't have to."

The strategy centres on making use of LME rules, which stipulate a low minimum load-out rate for metals stored in the warehouse network the exchange monitors. Warehouses do not have to deliver out any more than the minimum.

The warehouse logjams are compounded by financing deals, chiefly for aluminium, by which banks simultaneously buy metal and sell it forward for a profit, using cheap funding to store it inexpensively in the interim.

This results in a concentration of metal in locations where rent is cheap, exacerbating backlogs when material is booked for delivery by other warehouse users.

The operators of warehouses with long queues say delays are due largely to the logistical difficulties of moving metals out of the sheds and they are acting within LME rules.

The LME, which approves and monitors warehouses but does not own or control them, says the queues reflect high metal demand from investors at a time of low interest rates.

But industrial users of the LME fume about lack of available metal, and complain the queues undermine the LME's physical delivery function and its role as market of last resort. They also pay rent while they wait for their metal.

Some of these are becoming fatalistic and a source at a company trading on the LME said that the exchange's warehouse system may move to this new role, becoming a vault, while manufacturers needing immediate raw materials look elsewhere.

"Eventually it may just form a natural part of what this business is all about. If you want material and you want it now, then you will have to pay a premium to someone who has got it, maybe not even in an LME warehouse," the source said.

"And the LME warehouses will be performing a different service for different purposes."

BACKLOG HOTSPOTS

Long backlogs have developed in LME-listed depots in Detroit run by investment bank Goldman Sachs's subsidiary Metro; in Dutch port Vlissingen, where trader Glencore's Pacorini dominates; and most recently in warehouses at Antwerp in Belgium controlled by Trafigura's North European Marine Services (NEMS).

Between March 2010 and January 2013, Pacorini listed more than 70 warehouses with the LME, NEMS around 14 and Metro just over 20. Erus Metals, part owned by Barclays, is the newest in the LME warehouse business, with units in Britain and Antwerp.

Over the same period, independent Dutch warehousing and logistics firm C.Steinweg added a net total of one LME warehouse and Singapore-headquartered peer CWT Commodities two, according to Reuters calculations of information in LME member notices.

For those larger companies, adapting to the changes means focusing on logistics businesses, diversifying, reducing exposure to metal and seeking new markets.

"We're a logistics company. We happen to have LME warehousing," said Simon Maddocks, CWT director of metals.

"So if the LME warehousing part of the business is less than optimal for us because of pressure from competition, then we will find another way to make money in another direction."

CWT made a concerted move to expand its warehousing operations in the United States market in October 2010.

The aim was to benefit from the inflows of metal into Detroit, where Goldman's Metro dominates, but it has struggled to compete with the incentives paid by its larger competitors.

CWT has since expanded into physical metals and ores trading but it has no immediate plan to copy the other merchants and banks that have bought warehousing companies.

It is also growing in south America and southern Africa, where there are no such metals warehouse games, and into other commodities, like coffee. It is building sheds in Singapore, its warehousing stronghold, and investing in its logistics service.

Steinweg has bought South Africa-based Nomad Freight, a warehousing and forwarding company, in 2011. It has also acquired a majority shareholding in Bridge Shipping, which offers freight and storage in Africa.

While many of Steinweg's warehouses are LME registered, it also has depots approved by other commodities exchanges and has a vast, global logistics service.

It is the smaller independents that are feeling the squeeze, as they struggle to find ways to make up lost revenues.

"It's hard for us to compete against the big guys...We have to diversify how we use our warehousing space and consider other options - bars of soap, anything. It is so hard to attract metal at the moment," said the managing director of a small warehousing and logistics company registered with the LME.

"You cannot get paid for service in the metals storage industry," he added.

So far the LME has made modest increases in the load out rate and it remains to be seen whether Hong Kong Exchanges and Clearing, which has bought the exchange in a $2.2 billion takeover last year, will take further action.

But for those warehousers at the top of the metals storage game, it's boom time, with sheds full and queues long. "We never realised just how good this business was going to be," said an executive at one such company.

(Additional reporting by Melanie Burton in Singapore; Editing by Anthony Barker)