The London Metal Exchange (LME) has appointed external consultants to tackle the problem of queues at its warehouses, hoping changes to the system will be in place by April, writes Jonathan Watkins.

Consultancy firm Oliver Wyman has been selected to conduct a full-scale logistical review of the LME’s warehousing network, in order to establish operational expectations and requirements for the loading in, holding and loading out of metals.

Addleshaw Goddardwhich, another consultant, has been commissioned to conduct a parallel, legal review of the LME’s Warehousing Agreement.

LME is hoping the process will achieve its aim of reducing the queues, with changes pencilled in for April 1, 2014.

LME has faced growing pressure from market participants over its warehousing network and lengthy queues to withdraw physical metal from warehouses that have in some cases extended up to a year.

This has subsequently increased the costs of those paying for the storage and left them facing lengthy waits for delivery.

As a result there has also been a rise in the overall costs of metals, particularly in the exchange’s most actively traded contract, aluminium.

“The LME is aware of current market concerns in respect of high premiums in the aluminium market,” said Matt Chamberlain, head of business development at the LME.

“An element of premiums is related to the existence of queues, and this element will fall as our new rules take effect.

LME began taking action on the warehousing situation last year, taking what Charles Li, chief executive officer of LME’s parent Hong Kong Exchanges and Clearing (HKEx), described as a ‘fresh look at the issue’ with new proposals.

The LME is targeting warehouses with queues of more than 100 calendar days, which would be subject to the new requirements ensuring they deliver more metal than they take in.

The proposal operates by measuring all of the metal loaded into a warehouse over a three-month period.

If the wait is longer than 100 calendar days then the affected warehouse would be expected to deliver out additional metal based on a formula.

In a widely circulated statement last year, Li said that the exchanges would have to get a bazooka out to solve the problem of warehouse queues if it became a bigger problem.

As the LME looks to curtail these queues, derivatives giant CME will look to rival the London-based exchange’s flagship contract with the launch of its own aluminium contract.

The exchange hasn’t confirmed a launch date but said in October that plans were “very developed”.

The launch of another physically delivered aluminium contract would represent the only western challenge to LME’s offering.

In addition to the external consultants, LME has also appointed Professor Phillip Crowson as chairman of its new Physical Market Committee.

The committee will provide a forum for the physical industry to put forward its views to the LME and will meet for the first time in March 2014.

Crowson has been an Honorary Member of the Exchange since October 2009 and served as an Invited Director for 12 years.

He is also the current chairman of the LME’s Special Committee.