The exchange will require warehouses to carry out additional checks when bags of nickel are delivered in. It will also require them to carry out certain checks when bags of nickel are “warranted” (registered for delivery on the exchange) and when they are “rewarranted” (registered again, after previously having been deregistered).
The clash has also revived questions about the potential for conflicts of interest between storage companies and their biggest customers. It’s common practice for warehouses to offer a large slice of their rent — often about half — to the trader that originally delivered the metal, for as long as it remains in the warehouse. That means both parties stand to benefit the longer the metal stays put.1)
Mark Burton Archie Hunter Alfred Cang and I profile Istim, the warehouse company that stores roughly half the metal in the LME's global network.
The story is based on interviews with more than two dozen current and former metals insiders. Whelan and Istim are described in terms ranging from anger to admiration — and often both. Depending on who you talk to, they are either the bad boys of metals warehousing, or its creative geniuses.
Back then, the hot game in warehousing was rent sharing. Istim soon muscled in on the action, using the incentives to strike deals for new mountains of metal.2)
Rent sharing is now widely practiced by warehouse firms across the industry and is a key factor in the calculations for traders trying to make money out of the warehousing system. It’s also a regular annoyance for the LME, which rolled out rules in 2019 restricting how the incentives can be used. At times, however, such as during a 2019 run-in with Glencore Plc, the LME has also sided with Istim during disputes.3)
LME warehouses are sometimes subject to queues for the delivery of metals, where it can take time to withdraw stored metal due to limited daily load-out rates.
Metal owners may leave their stock in these warehouses even during long queues if the rent-sharing arrangements are favorable enough to offset the costs associated with waiting for metal to be loaded out.
Historically, some LME warehouse operators were accused of deliberately creating or maintaining long queues to benefit from rent income, prompting reforms by the LME to address this issue.