Stocks of aluminium sitting in London Metal Exchange (LME) warehouses fell by a net 5,225 tonnes on Monday. This is hardly news.
They fall just about every day and have been doing so for several years. Last month they hit a seven-year low of 2,746,275 tonnes.
As of yesterday’s report, they are a little bit higher at 2,755,600 tonnes. But they will continue falling. We know that because there are still 617,600 tonnes waiting to be loaded out of LME warehouses.
Such a steady attrition of exchange inventory would in theory suggest a market struggling with supply shortfall. So too would the persistent tightness at the front end of the forward curve. The benchmark cash-to-three-months LME spread closed on Monday valued at $23.25-per tonne backwardation.
Yet, as we all know by now, neither phenomenon has anything to do with underlying market reality. The outright price is currently trading around $1,585 per tonne, just $150 or so above levels last seen during the Global Financial Crisis of 2008-2009. That tells you that all is not well with aluminium. Rather, falling LME stocks and the resulting front-date tightness are all about the costs of LME storage.
It’s an area the exchange has historically shied away from tackling but no more.
A discussion paper is on its way “outlining its options in respect of the implementation of powers to cap rent” and load-out charges.
Those daily aluminium stock falls reflect first and foremost the LME’s drive to reduce waiting times to get metal out of the system. That’s why 3,000 tonnes were drawn down at the Dutch port of Vlissingen on Monday, the same amount that has left every day this year.
Pacorini, the warehouse operator holding just about all the metal at Vlissingen, is complying with the LME’s load-out rules.
The outflow of metal will accelerate this month and again in May due to new rules penalising any warehouse operator with a queue over 30 days. The queue for aluminium at Pacorini’s sheds in Vlissingen was 228 days at the end of January.
The LME’s increasingly complex web of warehousing regulations explain the amount of metal leaving Vlissingen but not the reason.
That’s down to the true problem with LME storage, namely the high cost relative to off-market storage.
All that aluminium flowing out of Vlissingen and Detroit, the other queue-affected LME storage point, is not going to manufacturers to be made into something useful. It’s going to other warehouses, ones where storage is a lot cheaper.
The LME has historically had no power to determine how much storage costs in its own approved warehouses.
It has been a hapless by-stander as warehouse operators have aggressively raised both their storage and load-out rates every year for many, many years.
The average cost of storing aluminium in an LME-approved warehouse has increased by a staggering 198% over the last 20 years.
It will jump again in the coming rent cycle year beginning April to an average 52 cents per tonne per day. Off-market storage can be had for as little as 10 cents, even lower in some locations.
And although two operators, Metro and ISTIM, have just reversed particularly egregious rent hikes, the trend of rising costs is still going to accelerate.
Metro, once infamously owned by Goldman Sachs and now owned by metals and property magnates the Reuben Brothers, has cut its aluminium rental fee from 77 cents per tonne to 60 cents in the US and lower at other locations.
ISTIM, which is the creation of Bill Whelan, the original owner of Metro, has also cut its US aluminium fee from 60 cents to 56 cents.
Both have also reduced storage fees for other metals and load-out charges.
They still sit at the top end of the LME storage cost spectrum but have fallen back in line with the rest of the warehousing pack.
It’s the first time the LME has allowed warehouse operators to adjust their proposed fees and that in itself says something about how flawed the whole process is. Mindful of the dangers of competition law, each warehouse operator has to second-guess what others will do each rental year.
The LME has the right to query particularly steep price hikes but it can’t reveal what others have submitted prior to publishing all the figures at the start of the year. This year it seems that both Metro and ISTIM guessed badly, leaving their proposals significantly out of line with the average and drawing heated criticism from other operators.
Which is why the LME decided to re-open a window for downwards adjustments on a “one-off exceptional basis”.
But even after these two fee reductions, the stock-weighted average storage fee will rise by 7% and the load-out charge by 9% from April.
That will only widen further the yawning gap between LME and off-exchange storage. So now the exchange is going to start what promises to be a long consultation process about giving itself the right to cap, maybe even reduce, warehousing costs.
It may seem surprising to an outsider that the LME cannot determine the costs of metal stored in its system.
The reason is competition law, first and foremost European competition law.
LME storage is itself a market with prices in theory set by free competition between multiple players, although the end result has ironically been highly uncompetitive prices relative to off-exchange warehouses.
But seen through the eyes of a regulator, the spectrum of storage costs resulting from the existing process, however flawed, is a good thing, a sign the “market” is working.

Andy Home is a columnist for Reuters. The opinions expressed are his own.