Metal warehousing tactics embitter coffee and cocoa market

Reuters  - Sarah McFarlane  -  Nov, 14

* Coffee, cocoa warehousing replicated metals business model

* Complaints of high rents, long delays, steep charges to withdraw material

* ICE says addressing warehousing practices a top priority

LONDON - The window is closing on lucrative - and much-resented - practices that some exchange-licensed coffee and cocoa warehouses have copied from the metals market, as exchanges step in to pre-empt scrutiny from regulators.

Complaints common in the metals markets such as high warehousing rents along with long delays and steep charges to withdraw material have recently been heard from the coffee and cocoa markets.

Regulators have already stepped in to look at metals warehousing practices in Europe, and now exchanges are taking action against at least two years of hoarding activity in coffee, and more recently cocoa, before the regulators train their spotlight on these markets, too.

Traders of coffee and cocoa have complained of the expense and delays involved in removing beans from some warehouses in Antwerp, where the majority of exchange stock is stored.

Some storage companies make money partly by charging low rent to attract material and higher rates to those taking delivery to retrieve it, while at the same time limiting access.

Exchange stocks back the futures contract, and when a buyer takes delivery of these beans it has no say in where they are stored, so cannot avoid warehouses operating such a business model. The new owner of the beans pays the rent until it is able to either move them to another warehouse with cheaper rent, use them, or sell them on, while the warehousekeeper has no incentive to move out stock.

InterContinentalExchange's acquisition of the Liffe coffee and cocoa contracts, along with recent regulatory and legal pressure on The London Metal Exchange's storage system, have helped prompt action.

"It's coming to a head, and people are drawing comparisons with what's going on with aluminium. You can draw comparisons with congestion at one or two coffee and cocoa warehouses," Michael Overlander, chief executive of brokerage Sucden Financial, told Reuters.

In metals, warehousing complaints have resulted in U.S.-based lawsuits by consumers, distributors and others alleging aluminium price-fixing and anti-competitive behaviour by some investment banks, large trading houses and the LME.

"It doesn't take a rocket scientist to see what's going on at the LME and see maybe we're (coffee and cocoa) susceptible to the same kind of criticism, because the models are somewhat similar, while not identical," a coffee trader said.

Last month ICE said that once it had acquired NYSE Liffe soft commodity contracts, warehousing practices in coffee and cocoa were among the top items to be addressed, while NYSE Liffe has already announced a warehousing review.

The deal completed on Nov. 13.

"There's been a lot of trade houses that have been upset by the amount they have been charged by warehouses when receiving coffee, and ICE is saying they are going to take a look at it," the coffee trader said.

COMPARE AND CONTRAST

Manufacturers needing raw materials like aluminium have long complained they had to wait months and pay dearly to get metal from some warehouses overseen by the LME around the world.

They blamed the exchange for allowing big banks and trading houses among its membership to buy warehouses and then make money by sitting on stocks, restricting supply and charging high rents even on metal caught up in queues to leave sheds.

Although coffee and cocoa warehouses did not experience ownership changes to the same extent, traders said the softs markets recognised how the practices adopted in metals gave players a competitive edge, prompting some traders and warehouses in cocoa and coffee to foster mutually advantageous relationships.

"They copied the LME model, and while it's been very profitable for them, it's been a shorter cycle than the metals," the coffee trader said.

Delays to the delivery of certified coffee out of Antwerp-based warehouse 4STOX NV, formerly known as Port Real Estate NV, triggered complaints by trade houses Armajaro and Sucre Export SA, culminating in the Competition Council of Belgium ordering the warehouse to maintain a minimum volume of loading out in May last year.

Other coffee and cocoa warehouses in Antwerp include C. Steinweg Belgium NV, Commodity Centre (Holdings) Ltd, CWT Commodities, Durme-Natie C.V.B.A, Henry Bath BV, Molenbergnatie NV and Pacorini Antwerp NV.

The consultation launched last month by Liffe asked market participants to give information on rents, movement-out rates and the amount of notice given to warehouses on upcoming stock movements. Responses were due by Nov. 13.

"It's the first time this thing has been really tackled," a European warehousekeeper said.