New Orleans Zinc Warehouse Queue Raises Alarm In Metal Market

NEW YORK, Jul 18, 2011 (Dow Jones) -- The line to pull zinc from New Orleans warehouses is getting longer, raising concerns that a new metals bottleneck is forming.

An unknown buyer's order Monday to pull 47,800 metric tons of zinc from London Metal Exchange storage facilities in New Orleans will instantly create a 44-day line for anyone looking to get metal out of the same warehouses.

So far only one of the city's five storage companies is known to have a queue. But metal analysts and traders say the newly formed line may be an early sign that LME's New Orleans warehouses are headed toward the same impasse that has aluminum buyers waiting as much as seven months to receive their metal in Detroit.

"It's not the Detroit of zinc--not yet," said Justin Lennon, base metals analyst with Mitsui Bussan Commodities.

Traders and consumers have complained in recent months about what they believe is an artificial logjam created by Detroit's aluminum warehouse owners, primarily Goldman Sachs' Metro International Trade Services LLC. The wait time to get metal out of Detroit has jumped to over five months as Metro released the exchange-required minimum 1,500 metric tons a day, even as the amount lined up to exit has soared.

The impact on metals markets would be much broader if New Orleans starts to see lines as long as Detroit's. The 550,000 tons of zinc in New Orleans warehouses represent 61% of LME's total stocks, a higher percentage than Detroit's 26% share of the exchange's aluminum supplies. That would leave fewer options for traders holding futures contracts traded on the LME, which may only be covered by metal stored in its warehouse system.

And while Detroit's warehouses hold almost exclusively aluminum, New Orleans storage companies also hold about 25% of the 460,000 metric tons of copper stored at LME warehouses. Any new requests to withdraw copper will have to join the queue behind zinc. 
To be sure, the competitive landscape is different in New Orleans, where no single warehouse firm has the same clout as Metro does in Detroit, where it owns 19 of 23 LME warehouses licensed to hold aluminum.

In New Orleans, Glencore International PLC's Pacorini Metals operates 19 warehouses licensed to store zinc, Metro has 16, and three other companies own one or two each. Only a long wait at Pacorini or Metro warehouses would have a widespread impact on the market.

The long wait times in Detroit have angered metal consumers such as Coca-Cola Co. (KO), who must get in the months-long line or pay extra for immediate access to metal stored elsewhere.

However, the big withdrawal order in New Orleans is likely from a bank or trading firm, because consumers don't need to buy a large chunk of raw material all at once, Lennon said.

Last week, the LME voted to double the delivery-out rate requirements for locations storing over 900,000 metric tons of metal, which currently applies only to Detroit. The new rules come into effect next April.

An LME spokesperson couldn't be reached for comment.