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COLUMN-As stocks fall, LME warehousers turn east in search of metal: Andy Home

Home@ (The opinions expressed here are those of the author, a columnist for Reuters.)

* LME warehouse changes by operator: http://tmsnrt.rs/2i5GpR9

* Distribution of stocks by operator: http://tmsnrt.rs/2i4PI43

* LME storage capacity by location: http://tmsnrt.rs/2i77dAS

LONDON, Aug 16 (Reuters) - First, the good news.

The warehouse load-out queues that exposed the London Metal Exchange (LME) to the harsh glare of both media and regulatory scrutiny have gone.

The original queue to get aluminium out of exchange warehouses in Detroit disappeared in April 2016. The even longer queue at the Dutch port of Vlissingen finally dissipated last month.

It's taken five years and a barrage of new rules and regulations to get there.

The breaking of the queue model has spelt misfortune for some warehouse operators and provided growth opportunities for others.

But here's the less good news.

LME metals storage remains tightly controlled by a small handful of the 30 registered storage providers.

And having repurposed its physical delivery system to facilitate load-out, the LME risks becoming a victim of its own success. Registered stocks are steadily dwindling as metal moves to off-market storage.

LME warehouse operators are fighting ever more fiercely for a slice of this diminishing pie, a battle that is now increasingly focused on Asia.

Graphic on major changes in LME warehouse units by operator:

http://tmsnrt.rs/2i5GpR9

LOSERS AND WINNERS

Vlissingen was the last of what the LME at one stage identified as five "embedded" queues.

There are still occasional "flash" queues caused by high-volume cancellations of LME-warranted metal in preparation for physical load-out.

As of the end of July, for example, there was a 25-day queue at warehouses operated by P. Global Services at the South Korean port of Busan.

But warehouse operators no longer profit from such bottle-necks and are instead incentivised to reduce them as quickly as possible. Anyone having to wait 25 days to get their metal pays reduced storage costs or nothing at all if the queue is over 50 days.

Unsurprisingly, the loss of the old queue money-making machine has led to a change of fortunes on the top table of the LME warehousing fraternity.

Metro International, which was hit with a retroactive $10 million fine for its role in creating and maintaining the original Detroit queue, has significantly reduced its LME foot-print.

It currently operates 33 registered storage units, half the number of two years ago.

Access World, the logistics arm of Swiss trade house Glencore and "owner" of the Vlissingen queue, has cut 31 units over the last two years. That said, with 128 registered units as of Aug. 8, it is still the second-largest operator after C. Steinweg.

The biggest "winner" in terms of number of registered storage units has been P.Global Services, which sold its LME warehouse business to Glencore in 2010 but has since reentered the fray. It has added 50 sheds over the last two years to give it a current total of 61.

BIG PLAYERS STILL RULE

Some of the faces may have changed but what hasn't changed is the concentration of stocks among just a handful of bigger operators.

As of the LME's most recent report for the month of July, just seven warehouse companies held 95 percent of all exchange metal stocks.

They were, in descending order: C. Steinweg, Access World, P. Global Services, ISTIM, Engelhart, Henry Bath and, still, Metro.

Indeed, the top two were storing almost 58 percent of the stocks between them. That ratio, by the way, is almost unchanged from July last year.

Graphic on LME stocks by warehouse operator as of July:

http://tmsnrt.rs/2i4PI43

Even these top operators, however, are fighting for dominance in a shrinking arena.

The amount of metal registered with the LME has fallen from almost seven million tonnes in April 2014 to just 2.6 million tonnes at the end of July this year.

Much of what has gone has been aluminium. And even the most bullish commentators won't claim that the four million tonnes of LME outflow since 2014 has been shipped to end-users.

Rather, the consensus view is that much, if not most, of it has simply shifted to cheaper, off-market storage.

COMPETITION TURNS EASTWARDS

As aluminium units have slipped into the statistical shadows in both the U.S. and Europe, the centre of LME stocks activity has increasingly turned to Asia.

There are just seven active LME good-delivery points for aluminium in the region but between them they now hold almost 600,000 tonnes of metal, representing 46 percent of the system total.

But this isn't just an aluminium story.

A breakdown of storage capacity by region confirms a broader shift eastwards.

Total capacity in the LME warehouse network fell by 294,000 square metres between June 2015 and June 2017. No surprise there given the overall decline in registered metal stocks.

But while storage capacity fell by 470,000 square metres in the U.S., primarily at Detroit, and by 156,000 square metres in Europe, it grew by 357,000 square metres at Asian delivery points.

The fastest growth in storage space in that time was recorded at Busan in South Korea, Port Klang in Malaysia and Kaohsiung in Taiwan.

Graphic on LME storage capacity by location:

http://tmsnrt.rs/2i77dAS

FROM FEAST TO FAMINE?

It might be argued that this migration of the LME's physical delivery function towards the Asian region is simply a reflection of broader macroeconomic forces. Asia, after all, is now the power house of metals usage.

But there is a strong sense that this is also in part a reaction to the LME reform programme of the last five years.

After all, the amount of copper sitting in the CME's domestic U.S. warehouse system has risen to multi-year highs.

And the occasional warranting of large tonnages of aluminium at non-Asian locations, such as the 19,900 tonnes that showed up in Rotterdam earlier this month, hints at what might be sitting off-market.

The LME itself seems to be aware that all is not quite right with its delivery function.

Why else, after forcing its warehouse operators to accept a rent cap, would it now be trying to get an agreement to actually cut rent?

That looks a tall order, given the massive gap between LME and non-LME storage costs. But the very existence of such a dialogue speaks to the growing disquiet among users that the interface between paper and physical markets is once again misfiring.

The queues may have gone but the LME's problems with its warehouse operators haven't gone with them.

It's just the problem has changed from one of too much metal to too little metal.

(Editing by Susan Thomas)