So, the great warehousing debate rolls on, with another review suggesting new regulations and controls on how warehouse keepers must behave.
The proposals represent another attempt to dissipate the occasionally acrimonious debate about queues, if not the queues themselves. The reality of the problem is incontrovertible.
I do not buy the “I can’t get metal” claim – producers will largely bite the hands off potential buyers in the current market – but the level of premiums created by the queues is uncomfortable.
There is a bit of a double-edged sword here, of course. The current aluminium premium levels, particularly, offer a little bit of solace to producers in the face of a hard-hit underlying price.
I’ve written before about my view of the aluminium price level and the actions (or inactions) of producers in the face of a clear global oversupply since the events of 2007/2008 – if there was no oversupply, there would be less scope for so much to sit uselessly in warehouses in the first place. I do not propose to address that again here.
What I have also said before is that I do not believe the current position is the result of rules being broken, but rather of the rules being inappropriate.
It therefore seems logical of the LME to undertake its proposed review, in the anticipation of modifying the rules to take account of current circumstances.
What worries me is where this approach may end.
Warehousing doesn't need to be taxing
It is possible to draw an analogy to the UK tax system, which has come in for a lot of criticism over recent months.
The problem there is that successive governments, over many years, have found that taxpayers have worked out loopholes in the system, enabling them to avoid (not evade, by the way) certain amounts of tax.
The answer of governments, almost without exception, has been to add another layer to the tax code to close each loophole in turn.
On the surface, that appears sensible enough. However, the result has become a massively complex tax code, fully understood only by specialised tax lawyers and accountants. Those specialists then have the sport of finding the next gap to exploit.
My point, and I think it is well recognised, is that by layering more and more regulation and control, the scope for creating unintended consequences (in this case, more loopholes to exploit) is consistently widened. The real answer is to simplify not complicate.
So it is with the LME. The latest proposals are a valiant effort to try and resolve the current problem, but the time may now be right to have a deeper look at what is required. With a new owner, there is an opportunity to ask the question: “What is the warehousing system actually for?”
I would suggest the answer to that is pretty simple: “To provide a satisfactory network of physical points enabling metal to be delivered against LME-traded contracts.”
Under new management
The new owner does not just have to accept what is there and add more complications. That will create more unintended consequences.
Just one that springs immediately to mind under the new proposals, is that they may create a situation where a warehouse, to protect its load-out requirements, may refuse to take metal in. That may cause problems for perfectly legitimate shorts who want to deliver against their positions. I would not like to be the one trying to resolve that legal argument.
I am not going to attempt to produce a solution here like a rabbit out of a hat, but I would urge the new owners to think laterally and pare back to essentials rather than tinker and add another potentially loophole-creating layer of regulation.
One thing I would say, though, is that it is probably time to look at the whole ownership issue.
In broad terms, I’m of the view that people should be allowed to do what they want, but that includes the right of properly constituted entities to set their own rules.
The banker/trader/warehouse monoliths have been generating huge amounts of money in recent years, and that probably lies at the heart of the problem.
Look around you – warehousing and storage is a feature of the way our world operates. But in most fields, it is a low-profile activity and produces commensurate profits. Cheap government-sponsored money and easily available metal have combined to distort the market.
It is time to ensure that traders are traders, bankers are bankers and warehouses are warehouses. Nobody involved in metal trading – futures or physical – should also be involved in the ownership of LME warehouses.
That will not immediately solve the problem, but given that we have seen what can happen, it will at least be a step in the right direction.