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In metal warehouse overhaul, pressure shifts from LME to regulators

NEW YORK, Feb 28 (Reuters) - A series of public and private meetings between the London Metal Exchange and its staunchest critics in the United States has revealed a small but significant shift in a years-long crisis over the exchange's warehousing policy, sources said.

After a sweeping overhaul of the LME's contentious warehousing policy, new CEO Garry Jones held three townhall meetings last week with U.S. metal users, a rare public relations tour meant to heal wounds and described by one New York participant as "group therapy" after years of acrimony.

The cordial tone of the meetings in Atlanta, New York and Chicago suggest that the exchange may have mollified many of its most outspoken foes, according to sources who attended the meetings. Many were surprised, having anticipated a fiery exchange on an issue that has polarized the industry.

To be sure, it is not because consumers are happy. An unprecedented spike in aluminum premiums to record highs this year re-ignited concerns over the market, which many still view as distorted by excessive stockpiling.

But there is a growing recognition that the LME may have reached the limit of what it can do. Some are now renewing a push for U.S. regulators and politicians to take up the fight for even tougher oversight of the world's oldest and biggest metals market and its warehousing network, sources said.

"I can't see a scenario where regulators can justify this. If the LME can't do anything else, the regulators can," said a source who followed the Chicago meeting.

Jones ended his whirlwind trip in Washington, D.C., on Friday, meeting with Mark Wetjen, acting chairman of the U.S. derivatives regulator, Commodity Futures Trading Commission, sources familiar with the matter said.

The LME is regulated by the UK'S Financial Conduct Authority, but the CFTC has jurisdiction over its U.S. business through a 2001 no-action letter and the exchange's application to give it foreign board of trade (FBoT) status.

While details of their discussion were not disclosed, their meeting has sharpened the debate over possible intervention in the United States, where Goldman Sachs's warehouse Metro has drawn the most political, legal and regulatory scrutiny.

The LME declined to comment on the roadshow.

70-PAGE SLIDESHOW

Big consumers, such as MillerCoors, that use aluminum to make beverage cans, have complained that the LME's warehousing policy has allowed warehouse operators owned by banks and merchants to create logjams, distorting supplies and inflating physical prices for the past four years.

Facing intense political and regulatory attention, the exchange announced in November an unprecedented overhaul of its storage rules, which will go into effect in April and will force warehouses to deliver metal out at the fastest pace in the LME's 137-year history.

The U.S. tour was aimed at explaining how the new rules link the rate at which storage firms deliver metal out with the level of inflows, which will stop queues growing and shrink wait times in five key locations in Europe, Asia and the United States, where backlogs range between 200 days and one and a half years.

In a 70-page slideshow seen by Reuters, the LME showed charts displaying wait times dwindling since last summer for three out of the five locations that had big stockpiles.

"They said (the stock data) demonstrated the warehouse games were over," said a source at the Atlanta meeting.

In the other two locations, however, the queues have lengthened to between 550 and 650 calendar days, the chart shows. While the cities are not identified, participants said they were likely Detroit, where a third of the LME's total 5.3 million tonnes of aluminum is held, and Vlissingen in the Netherlands, where Pacorini, which is owned by Glencore, operates sheds.

Private meetings with Novelis, MillerCoors and The CocaCola Co., the most vocal critics of the LME's handling of the controversy, likely kept the tone "cordial", a source said.

For some, the detente may only reflect a temporary lull until the rules come into force in less than two months.

"The market can only really pass judgment once the rules come into effect," said the participant at the New York meeting, attended by some 70 traders, brokers and bankers.

The biggest outbrust was in New York when a scrap trader criticized the LME for giving undue influence to speculative investors, sources said.

EYE ON REGULATORS

The LME executives fielded questions at each meeting about whether the rule change goes far enough, but they told participants bigger changes would have caused even greater disruption.

"They said, 'We understand your argument and we don't disagree with you. The queues are bad for us too because it damages our price mechanism, but we can't make a rash change'," said the source following the Chicago meeting.

So some U.S. participants are pinning their hopes on the CFTC continuing to lead the charge ahead of its British and European counterparts.

Last summer, the commission opened a preliminary inquiry into complaints that banks including Goldman Sachs and merchants Glencore Xstrata Plc have inflated physical aluminum costs through their ownership of metals warehouses.

Goldman and Glencore say there is no merit to the claims.

Even so, the issue has captured attention in the Capitol. Senator Sherrod Brown, a Democrat from Michigan who chairs a powerful committee overseeing Wall Street and commodities, is pushing for U.S. regulators to increase vigilance over the LME through its FBoT status, a spokeswoman said in an email.

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