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- European Economics: LME FOT Study (February 2007)
- European Economics: LME FOT Study - Next Steps Recommendations (March 2007)
- LME FOT Study - Note from Phillip Crowson (March 2007)
Introduction
1. In September 2005 the Warehousing Committee requested that EXCOM commission an independent and impartial study into the implications for the metal industry of a potential change in its standard contract terms for metal delivery from an “in warehouse” basis to a “free on truck” (FOT) basis. Currently, the warehouse company fees for removal of the physical metal from the warehouse are paid by the owner of the metal at the time of removal. The study was commissioned to examine the implications of the fees being paid instead by the owner of the metal at the time of deposit.
2. EXCOM referred the request from the Warehousing Committee to the Board which gave its approval to the commissioning of such a study in October 2005.
3. An FOT study working group, under the chairmanship of Professor Phillip Crowson, was subsequently established by the Warehousing Committee to select an appropriate consultant to conduct the study.
4. Following an extensive tender process, in June 2006 the Exchange engaged Europe Economics, an independent economic consultancy based in London, to conduct the study. The terms of reference for the study were agreed by the Warehousing Committee and are summarised in LME Notice 06/271.
Report completed
5. Europe Economics concluded their study and delivered their report on 20 February 2007. In preparing their report, Europe Economics consulted widely within the metals industry in order to obtain an accurate a view as possible on the consequences of moving to an FOT basis of contract and gain an understanding of all viewpoints within the industry on the matter. All interested parties were invited in LME Notice 06/271 to express their views to Europe Economics.
6. Professor Crowson, as chair of the FOT study working group, has prepared a paper summarising the conclusions of Europe Economics and setting out the recommendations of the working group. In addition, at the request of Professor Crowson, Europe Economics have provided a short paper containing recommendations on next steps.
7.Both Europe Economics and the working group recommend against a change from “in warehouse” to an FOT basis of contract.
8. The full Europe Economics report together with the supplemental papers prepared by Professor Crowson and Europe Economics may be downloaded from the LME’s website.
Recommendations
9. The Board has carefully considered the Europe Economics report together with the recommendations of the working group, Europe Economics and the Executive and all other representations made to the Exchange on the issue, including from the IWCC.
10. The Board has concluded it is not in the best interests of the Exchange or the wider metals industry to change from an “in warehouse” basis of contract.
11. The Board has considered all relevant aspects, including the report from the LME’s Complaints Commissioner which is the subject of a separate Notice issued today, and agrees with the recommendations of the working group. Accordingly the Board has confirmed the following actions:
(a) The Exchange should continue to keep warehouse locations under constant review, in accordance with the Exchange’s location policy, in order to optimise warehouse numbers and locations. The Executive will, in conjunction with the metals committees, conduct a micro-level analysis of locations on an annual basis. In addition, outside consultants will be brought in on a periodic basis to carry out an economic analysis of areas of net consumption on a macro basis. The Exchange’s policy should also be reviewed periodically by the metals committees and external consultants as necessary.
(b) The Executive should continue to challenge the legal constraints around setting maximum FOT rates and, if possible, seek guidance on the matter from the European Commission.
(c) The Board takes note of the comment in Professor Crowson’s paper that the relationship between the Exchange and warehouse companies should become one of constructive co-operation. The Exchange has been working at increasing co-operation for some considerable time, not least by inviting warehouse company representatives to attend meetings of the Warehousing Committee as a matter of course, and will continue to explore further ways of increasing co-operation.
12. The Board will continue to keep a close watch on all warehousing matters as it believes the Exchange’s warehousing operations, and in particular the location of its warehouses, play a crucial part of the Exchange’s role as the world’s premier non-ferrous metals market in providing a reliable price discovery mechanism.
13. The Board would like to express its gratitude to Professor Crowson and the other members of the FOT study working group for their considerable commitment on this important matter during the last year, also to all those who participated in the consultation with Europe Economics.
Martin Abbott
Chief Executive
