London Metal Exchange aims to double cuts to warehouse logjams

* To launch new aluminium premium, ferrous contracts in Oct

* New proposals could cut queues twice as fast
* Opens door to capping, banning rents in warehouse queues

(Reuters) - The London Metal Exchange (LME) announced new rules and proposals on Monday aimed at slashing delivery backlogs at its global network of warehouses twice as quickly as under current reforms.

The move is part of a wide-ranging reform drive sparked by consumer complaints about long delays to obtain aluminium from storage and lawsuits accusing banks and commodity companies of conspiring to restrict supply through the warehouse network.

The LME, the world's oldest and biggest market for industrial metals, also said in a statement it planned to launch new contracts for aluminium premiums and ferrous products on Oct. 26.

The LME launched consultations last November on a second layer of rules governing physical delivery and on Monday it requested even more feedback on further measures.

The exchange asked members for their opinion on proposals that would force warehouses to reduce queues faster.

The 137-year old LME won a major court battle in October, giving it the green light to implement its initial set of regulations on Feb. 1 aimed at cutting delivery queues to a maximum of 50 days from up to two years at some depots. 

On Monday it said was now responding to complaints that under the current reform it may take as long as four years to cut backlogs at the worst affected site -- the Dutch port of Vlissingen.

Under the new tougher rules, it would take a maximum of 2.3 years to reduce queues to 50 days, Matt Chamberlain, LME head of business development, told a news conference.

"So in this example, the rate at which queues will fall would double -- the queues would last half as long."

NEW CONTRACT DELAY

The exchange, owned by Hong Kong Exchanges and Clearing Ltd , also set a firm October date for the launch of three new contracts: aluminium premiums, steel scrap and steel rebar.

The aluminium premium contract, which allows people to hedge additional surcharges for buying metal for immediate delivery, has been delayed from a second quarter launch.

This was because the LME first wanted to conclude any further warehouse reforms, which could have had an impact on premiums, Chamberlain said.

The exchange also released a discussion paper on the possibility of capping or banning rents in queues.

Buyers of metals have complained about having to pay high rent during the months that metals were stuck in backlogs waiting to be delivered from warehouses.

Previously the LME has rejected the idea of setting rent levels at warehouses, saying it had legal advice that it might fall foul of competition law.

The exchange published a detailed set of new rules on Monday to take effect on June 1, one of which will require warehouse firms to report anonymously incentives paid to metal owners so it can determine whether those payments were market distorting.

Chile copper production surged 13% in January

The copper output by Chile rose significantly during the month of January this year. This is when compared with the same month a year ago. According to latest statistics released by the National Statistics Institute (INE), the country’s copper production during the month totaled 524,296 mt. This is 13% higher when compared with the output of 463,321 mt in the same month last year. When compared with Dec ’14, the copper production levels during Jan ’14 held steady.

 

The country’s industrial production registered a growth of 5.8% during the month, on account of robust 10.1% yearly growth in mining. The mining sector growth was led by 13% rise in copper output during the month.

 

According to the government, the higher copper output is mainly on account of increased output from a major mine which had operated below capacities in 2014. In addition, a number of processing plants had undergone temporary maintenance shutdowns during January last year, which led to rise in output during January this year. The higher ore grade output at another key mine also contributed to rise in copper production during the month.

 

The output from large mines was up by 12.2% year-on-year. The medium-sized mines boosted their output by 55.5% during the month. On the other hand, production from small mines continued to struggle, falling by 7.4% over the year.

 

Rising electricity costs and extreme drought conditions are feared to impact copper production by Chile, which accounts for over one-third of the global copper output.

UBS wealth management raises 12-month copper forecast on mine supply challenges

(Reuters) - The wealth management arm of Swiss investment bank UBS has boosted its 12-month copper forecast to $6,700 a tonne from $5,500 on growing challenges to mine supply.

 

"Mine supply challenges from various directions are likely to reverse the copper price decline in recent months. We raise our 12-month forecast to $6,700/mt from $5,500/mt," it said in a note dated Feb. 27.

 

UBS Wealth management is an independent unit of the bank, which creates its own forecasts. UBS cut its copper price target for 2015 to $2.65 a pound ($5,842 a tonne) in mid February due to a deterioration in short-term fundamentals. 

Some simple trading strategies

No respite on transaction costs nor on taxes (STT or CTT)

While the Corporate India may have many reasons to celebrate – from lower rate of taxation to direct and indirect measures to support Make in India, stock brokers have got a raw deal in this Union Budget presented by finance Minister Arun Jaitley. 

Brokers were expecting some respite on security transaction tax, commodity transaction tax to cut down on the transaction tax. The logic was lower STT or CTT will lead to lower transaction costs and more investors and traders will participate in the stock and commodities market. This demand did not fructify. 

Brokers also did not get any favourable response on their prayer of reducing short term capital gain, which is charged at 15.45% on gains on equity investments held for less than one year. 

Brokers have to pay service tax on the brokerage charged to the client. This further inflates the transaction costs for the end traders and investors. Brokers demanded a cut in rate of service tax from extant 12.36%. In line with overall increase in service tax to 14%, brokers have to collect more from their clients, resulting into higher transaction costs.

Brokers were demanding lower transaction taxes and lower capital gains tax.

All clear for FMC merger with SEBI

As expected, Finance Minister Arun Jaitley has proposed to bring the commodity futures market and the securities market under a single regulator. BusinessLine reported on February 16 that the Budget may announce SEBI-FMC merger.

“The proposed merger would help streamline the monitoring of commodity futures trading and curb wild speculation,” the FM said in his speech.

As the proposed changes are in the Finance Bill itself, the merger can happen when the Bill is passed and take effect as early as May.

“A separate Bill would have faced the risk of going to Standing Committee with consequent delays,” said an official, on condition of anonymity.

The proposal is likely to bring convergence in the regulation of various financial markets such as securities, currency derivatives and commodities, facilitating tracking of money flows into these markets in addition to opening the door for launching new instruments in the commodity derivatives market.

For brokers substantial savings in costs are anticipated as separate setups for regulatory compliance may not be required, according to Geofin Comtrade Ltd, a trade intermediary.

Sanjay Kaul, MD & CEO, National Collateral Management Services, perceives the merger proposal as a game-changer for the commodity market as the step will lead to improved credibility, transparency and regulation.

While equities are an established asset class for investment, commodity futures market came into prominence as a tool for hedging the price risks that the underlying commodity often faces. Therefore, there is a basic difference in the participants’ approach to the two markets.

In recent times, commodities too have emerged as an asset class. However, the flow of speculative capital for investment in sensitive commodities (such as essential food items) has the potential to fan inflationary tendencies.

A question that has bugged market participants is whether the merged entity will have sufficient bandwidth in terms of domain expertise, infrastructure and manpower to regulate the two markets that are seemingly similar but structurally different.

Delivery of goods is one such issue. Under Indian conditions, a sizeable number of market participants give or take delivery of the underlying physical commodity through exchanges. Regulatory intervention becomes necessary on occasions, something the securities market rarely faces.

In addition to unification of regulators for a more effective oversight, there seems to be an unstated intention to regain market confidence that was lost following the 2013 NSEL payment crisis that worsened because of a regulatory vacuum.

The merger of Forward Markets Commission, the commodity markets regulator with SEBI, the securities market regulator, is in keeping with the recommendation of the Financial Sector Legislative Reforms Commission headed by former Justice BN Srikrishna which called for a Unified Financial Agency in lieu of multiple regulators in the financial sector.

A single entity as regulator is expected to be able to regulate the two markets more effectively. The process of unification of the two regulators is likely to be in a phased manner as there are challenges to be met.

While the trading systems in the two markets – commodities and equities – are similar (Online trading), there are fundamental differences between commodity and equity markets in terms of market structure, participation, impact, delivery systems and so on.

Governance to improve for comexes

The change

The ₹5,600-crore payment crisis that led to the collapse of the country’s single largest commodity spot exchange- National Spot Exchange Limited (NSEL) has resulted in the government making earnest efforts to bring the regulation of the commodities markets under the Securities Exchange Board of India.

The background

FMC, which was earlier under the Consumer Affairs Ministry, was brought under the Finance Ministry in September 2013 as investigations in to the NSEL scam began.

Volumes in commodity exchanges stumbled after the NSEL fiasco. In 2013-14, the total commodity futures market turnover was down by 40 per cent. During April-December period of the current fiscal, the situation is not any better. Though the commodities transaction tax and the correction in global commodities market are partly responsible for this, the impact of NSEL’s fallout can’t be overlooked. Samir Shah, MD and CEO of NCDEX, told BusinessLine, “One incident like NSEL is a big blow on the market and market gets shattered, NSEL impacted NCDEX more than MCX, because it happened in the agriculture sector.” The blind spots in commodities market regulation came to light only after the NSEL scam – non-existence of settlement guarantee fund, no checks to spot short trades, poor margining system, inadequate collateral for trades and no regulator willing to take the onus of regulating the spot commodities market.

The verdict

SEBI’s autonomous functioning and its ability to respond quickly to a crisis should instil confidence in commodity investors. With its powers to attach properties, arrest and detain defaulters in prison, this regulator will be able to protect the interest of small investors better. Also, since SEBI has a sound experience in handling securities derivative market over the many years now and has a larger man-power, it should be able to plug the loop-holes in the system and draw out a stronger regulatory framework for commodity exchanges.

Commodity market participants hope that the move will help introduction of new products such as options and commodity indices and the exchange platform will be also opened to new participants such as banks and mutual funds.

All this should, however, take time. Amendments to the various Acts apart, the new regulator’s first job will be to establish a pan-India spot market for commodities.