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COLUMN-LME warehouse wars rumble on in the Malaysian jungle: Andy Home

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

* LME warehousing units: tmsnrt.rs/3aXHdPQ

* Port Klang storage by operator: tmsnrt.rs/2G0dURu

* Port Klang load-out queues: tmsnrt.rs/3jhXvpW

LONDON, Aug 27 (Reuters) - The London Metal Exchange (LME) last week approved the listing of two new storage units in Port Klang, confirming the Malyasian port’s rapid emergence as a major LME warehousing hub.

Port Klang held 1.01 million tonnes of registered metal at the end of July, 43% of the total inventory in the exchange’s global delivery network.

LME warehouse operators have been rapidly building out capacity at Port Klang and the collective pivot towards Malaysia shows no signs of abating.

As always when it comes to LME warehousing, this is all about aluminium. The market has a history of surplus and large stocks. This year’s COVID-19 crisis is expected to result in more of both.

Operators are slugging it out for the aluminium storage prize and although the LME claims to have vanquished the long load-out queues that plagued the aluminium market in the past, it is clear it has far from tamed the animal spirits of its warehousers.

The LME storage wars, which were once fought out at Detroit and then the Dutch port of Vlissingen, have simply moved to a new setting.

SWEATING IT OUT IN SWETTENHAM

There are now 115 LME-registered sheds in Port Klang, up from just 42 two years ago. Only Rotterdam has more listed units and that’s largely down to Dutch logistics operator C. Steinweg’s historical footprint in the city.

Port Klang’s LME storage capacity grew by 31% to 549,000 square metres in the year to June 2020, the fastest rate of increase of any LME delivery location and one which leaves it trailing only Rotterdam and Busan in South Korea.

The port, originally called Port Swettenham after its colonial-era founder, Sir Frank Swettenham, was cleared from the malarial swamps to serve Kuala Lumpur.

It’s not an obvious hub for 21st century metals storage unless you’re in the LME warehousing business.

The first LME warehouses in Malaysia opened at Johor in the mid-2000s as warehouse operators sought a cheaper alternative to Singapore. However, limited container capacity and competition from other freight pushed LME logistics companies to Port Klang, which had plenty of space next to a newly-established but under-used free zone, according to one LME warehousing veteran.

Handling costs are “reasonable and independent stevedores compete for business,” he noted.

The location also has one other key advantage for warehouse operators. Metal is more likely to stick there, unlike LME warehouses in South Korea and Taiwan, which are vulnerable to periodic stocks stripping to meet local or Chinese consumption.

ALUMINIUM WARS

After Port Klang was first constructed at the end of the 19th century, the only metal moving through it was Malaysian tin. Today it is an aluminium port with 921,025 tonnes of registered metal, almost 60% of all the aluminium in the LME’s global warehouse system.

There were another 406,000 tonnes sitting in “shadow” storage at the end of June, meaning metal that is being warehoused under a contract with explicit reference to the option of LME warranting.

All this metal is constantly on the move as warehouse companies compete with rivals and traders for tonnage.

Port Klang has registered 853,000 tonnes of aluminium “arrivals” and 622,000 tonnes of “departures” so far this year as metal revolves between on- and off-market storage depending on warehouse incentive deals.

And if that all sounds familiar, it’s because it is.

Detroit was infamous for its “merry-go-round” deals and Vlissingen for the “Dutch round-about” as aluminium shuttled back and forth to Rotterdam.

Many of the players are the same as well.

The dominant operators in Port Klang right now are Access World with 43 units, ISTIM with 27, C. Steinweg with 20 and P. Global Services with 14.

The same four companies bestride the entire LME warehousing landscape, storing 85% of registered stocks at the end of July.

All four are battle-hardened from previous storage wars, two in particular.

Access, part of trading powerhouse Glencore, was the “owner” of the Vlissingen load-out queue, which at one stage in 2014 stretched out to an astonishing 748 days.

ISTIM, meanwhile, is the latest incarnation of the Whelan family, creators of the original aluminium load-out queue at Detroit, although Goldman Sachs industrialised the model after buying the Whelans’ Metro International warehouse company in 2010.

Metro, by the way, is now owned by the Reuben brothers, property and metals tycoons, and is still the fifth-largest holder of LME metal.

LME warehouse company ownership can itself be a circular game of musical chairs.

MULTIPLE FLASH POINTS

The LME has spent a lot of time overhauling its warehouse system to prevent the sort of load-out queues at Detroit and Vlissingen that caused so much regulatory and media grief last decade.

A mandate for faster load-out of metal prevents queues becoming self-generating or what the LME calls “structural”.

“Flash” queues still occur whenever large amounts of LME metal get canceled and scheduled for physical load-out.

No surprise that Port Klang is the location for most of these flash log-jams, given the amount of aluminium that is constantly on the move.

Indeed, there has been a load-out queue at ISTIM warehouses in the port at the end of every month since the start of 2019, varying from 229 days in February 2019 to 11 days in November of the same year. The LME’s most recent report shows a 68-day queue for aluminium at the end of July.

Evidently, some sort of modified queue model is at work, although it’s hard to discern in the general melee.

Just about every warehouse operator in Port Klang has experienced a flash queue at some stage in the last couple of years amid the fierce competition for cheaper storage.

The slug-fest spilled into the open early last year, when Glencore and ISTIM clashed over an interpretation of the LME’s increasingly complex load-out rules.

The exchange itself seems to have tired of tweaking its rule-book, although it is still experimenting with allowing warehouse operators to earn more from queues as a way of helping them entice more metal in.

Attracting aluminium doesn’t seem to be the problem at Port Klang. It’s more keeping it in one storage shed for any period of time.

The LME storage wars continue, albeit muted by the exchange’s regulatory crackdown on the worst excesses of the past. And while they rumble on, the market for LME storage is going to remain a significant driver of LME metal markets.

The rise of Port Klang is itself proof of the continuing influence of the LME warehousers.

The largest part of the exchange’s registered stocks are now located where it suits warehouse operators rather than metal users.

Editing by David Holmes

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