Agri Business

LME eyeing tie-ups in India to set up warehousing chain across country

PALAK SHAH Mumbai | Updated on November 13, 2018 Published on November 13, 2018

London bourse seeks to strengthen its influence over commodity markets here

London Metal Exchange (LME), which has the largest network of warehouses globally, may woo SEBI and the Centre with a plan to enter into domestic tie-ups for development of a warehousing chain in the country.

LME chief Matthew Chamberlain will be meeting senior officials from SEBI and Finance Ministry on his visit this week for a commodity markets event, sources close to the development told Business Line.

Regulatory experts are of the view that LME may want to make it big in warehouses in India to strengthen its position as a stakeholder in domestic commodity markets.

It already earns huge licencing fees from commodity bourses in India, mainly by providing reference rates for settlement of futures contracts in the base metal segment.

LME did not respond to an email query on its warehousing plans.

Delivery shift weighs

It is estimated that Indian exchanges may not require exclusive LME prices if the settlement mechanism of base metal contracts in the futures segment is delivery based rather than the current cash-based method.

The delivery mechanism is already operational for bullion contracts and Indian exchanges do not have to pay any global exchange money for settlement or reference rates, which are domestic despite India being a large net importer of the metal.

Delivery of the goods is often based on the domestic price pooling method and takes into consideration the local tax structure and other risks.

“LME may dangle a carrot to the government and regulators to defend its licencing fees and hence propose developing a warehousing chain in India. But the fact also remains that India needs to upgrade its warehousing capacity and there could be no better partner then LME,” a source following the matter told BusinessLine.

Experts also say that FPIs may have a lack of interest in playing in Indian commodity markets if the settlement prices are from LME as they can always trade in London.

The LME does not own or operate warehouses, nor does it own the material they contain.

It simply authorises warehouse companies and the warehouses they operate to store LME-registered brands of metal, on behalf of warrant holders, and to issue LME warrants through their London agent for material delivered into their approved warehouses. Therefore, if LME gets into warehousing in India in a big way, domestic traders cannot escape dependence on its reference rates, commodity dealers said.

LME has a network of more than 600 approved warehouses in 37 locations across the world, including Asia. It is owned by Hong Kong Exchanges and Clearing Ltd. The LME also approves warehouses as part of its LMEshield offering, which facilitates the electronic transfer of ownership for off-warrant commodities.

Currently, speculators generate huge trading volumes on exchange platforms in the base metal market, while some corporates who actually want to hedge their business risk mostly do it off-shore.

Regulatory experts are of the view that if base metal contracts are delivery based and settled at Indian rate it will encourage large domestic players to participate.

Published on November 13, 2018
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