Metals warehousers plan rent rises to make up for shorter queues
* Warehouse firms with long queues to lose out from LME plan
* Raising rents would be a way to claw back lost revenues
* LME says capping rents would be anti-competitive
LONDON, July 17 (Reuters) - Companies owning warehouses plan steep rises in storage charges to recoup lost income if the London Metal Exchange (LME) makes them shorten queues for its clients to withdraw metals such as aluminium, industry sources say.
The LME, the world's biggest marketplace for industrial metals also including copper and zinc, on July 1 proposed an overhaul of the global warehousing system it oversees.
If implemented after consultation over coming months, the change will help industrial clients but curb profits for the banks and trade houses that own warehouses.
At stake for the warehouse owners are rental incomes that in some cases total hundreds of millions of dollars a year.
"The warehouse companies are looking at their options, and one of the options is to increase rents substantially," said one warehousing source, without giving an amount.
Several companies with warehouses registered by the LME, including Glencore-owned Pacorini, Trafigura's NEMS and Goldman Sachs' Metro, have found a lucrative business in building up big stocks, charging rent for storage and delivering metal out of storage only at a limited rate.
Metal users can queue for up to a year to get material they have bought via the LME, paying warehouse owners full-price rent while they wait, and have called for action by the exchange.
The LME can demand faster delivery out of sheds but cannot limit rent increases as any such move would be deemed as price fixing by the European Union and therefore anti-competitive.
This warehousing controversy has been so toxic it endangered the $2.2 billion takeover of the LME by Hong Kong Exchanges and Clearing Ltd, agreed last year.
Failure to resolve the issue could lead to a loss of business to sheds outside the system of LME-registered storage that guarantees metal quality and helps maintain the exchange's position as a reliable source of metal at a market price.
The LME proposal links the minimum rate at which a warehouse with big stockpiles and long wait times - more than 100 days - is required to load out material to the rate at which it brings in new metal. Only five of 36 LME-registered locations around the globe have queues of more than 100 days.
In Detroit, for example, where Goldman's Metro warehousing company dominates, the wait for aluminium is 469 calendar days.
At 48 cents per tonne the queue is worth around $220 million, excluding other charges, according to Reuters calculations. With a queue of 100 days, and at the same rent, that income would plunge by more than 60 percent.
A second warehousing source also said a big rent rise was possible if the proposal in its current form came into effect. However, he thought the proposal would probably be watered down.
Pacorini does not comment to media. A Trafigura spokeswoman said the firm was participating in the consultation and gave no further comment. Metro was not immediately available to comment.
For warehouse operators to fully counteract the decline in rental income this way, the daily fee would have to rise to $2.21 per tonne, a near four-fold increase in rents from current listed levels, Barclays said in a research note.
"We do not expect such a degree of rent hikes, but warehouse operators will inevitably lobby for a more substantive year-to-year increase than is usually seen in listed LME warehouse rents," Barclays said.
Rents for LME aluminium, the most widely stored metal, have risen almost 50 percent to a median 47 cents per tonne since 2007/2008, according to Reuters calculations.
They jumped as much as 10 percent for some metals last year to offset an earlier LME attempt to cut queues via new higher load-out rates.
Warehouse companies set their rents independently of each other, taking into account inflation, economic conditions and LME rule changes among other factors. They submit rent proposals to the LME by Dec. 1 every year and these take effect in April.
While the LME can ask warehouse companies to justify their new prices, it cannot force any changes.
"That's illegal," LME Chief Operating Officer Diarmuid O'Hegarty said at a media briefing. "We cannot control who owns warehouse companies, we cannot control rents, and we cannot control delivery out charges."
O'Hegarty added the three-month consultation would hopefully flush out some of the potential consequences of the proposal, such as steep rent rises.
"The LME will have a new problem and it won't be the queue problem any more. The rent issue will need to be dealt with by a regulator," said a U.S.-based metals trader.
"The EU has said the LME has no right to determine rents. But they were increased 6 percent last year in a deflationary environment."
U.S. anti-trust lawyer Robert Bernstein, a partner at New York-based Eaton & Van Winkle LLP, said non-LME rents are much cheaper, so any big rate rises would spur more storage outside the LME system.
"This may be a boon for delisted warehousing," Bernstein said.
And Deutsche Bank said this week there is a danger LME storage could price itself out of the market, "ultimately leading to a breakdown of the price-finding function that the exchange performs".