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* Metal stocks start moving, possibly to unregulated warehouses
* Pacorini, Impala delist 22 warehouses from LME system
* Financing deals still popular, warehouse costs low off-exchange
By Susan Thomas and Melanie Burton
LONDON/SYDNEY, Feb 14 (Reuters) - A bid by the London Metal Exchange (LME) to ensure clients can obtain aluminium faster from owners of warehouses in its global network risks eroding its function as the world's top metals marketplace.
Some warehouse companies are starting to walk away.
Industry leaders and analysts say shed owners, who profit from keeping aluminium stockpiles in long-term financing deals or to earn rent, are preparing to move metal to depots that are beyond LME supervision.
This could mean the LME, bought by Hong Kong Exchanges and Clearing
Less metal will also be available to industrial companies that have bought LME warrants - quality-assured ownership certificates - through the futures exchange.
The LME, reacting to bitter complaints from metals users about delays in getting hold of metal with their warrants, last year announced changes to its rules on warehouses, stipulating a 50-day maximum wait time.
In a notice to members this month, the LME said an expected consequence of increased load-out of metal from LME warehouses was a quicker net flow of metal to off-LME storage, with potential difficulties for the market in respect of stock visibility, premium price discovery and hedging.
"Off-LME storage is, by definition, not a topic on which the LME can comment," it said in the notice.
The rules come into effect on April 1 but already metal is being shifted, not so much into the hands of manufacturers needing raw material, but into warehouses where the LME has no say.
"If you look at total inventories today they are going down, but there is movement between the reported inventories and non-reported inventories," said Svein Richard Brandtzaeg, the chief executive of Norsk Hydro
"We believe this metal doesn't necessarily move into the industrial physical market."
To support the mechanism of physical delivery of its contracts, the LME approves and licenses some 700 warehouses in 36 locations around the world. Warehouse companies must meet strict criteria before they are approved to handle metals.
But their function has been distorted in recent years by banks and trade houses that bought warehousing companies and made solid profits, in a low-interest-rate environment, by stockpiling mountains of metal and eking out deliveries.
This process has concentrated metal in certain locations, pushing up costs for consumers.
In a sign the new LME rules are having an impact, Glencore-Xstrata's
The depots are empty, industry sources said, having been built in readiness for future inflows of metal that would have been used for rental income.
Now though, their delisting means those 14 are no longer available for physical settlement of LME trades and there is a good chance they will be used to store off-exchange metal, possibly lured by discounted rents.
"We are concerned about transparency in the market. I think it's very important that the LME price setting of aluminium is as transparent as possible," Norsk Hydro's Brandtzaeg said.
Pacorini's 14 delistings followed eight in Antwerp, by trade house Trafigura's Impala Terminals.
"The game has changed," a warehousing source said. "They are now offering discounts on the rentals ... for off-warrant material."
UNDER PRESSURE
"The pressure is certainly on when it comes to operating an exchange-approved warehouse, which explains why these delistings are taking place," INTL FCStone analyst Ed Meir said.
"I think the warehousing trade is still intact; it's just that the LME is making it more difficult to implement the trade within its own regulated warehouses, and as a result the trade is shifting away from listed warehouses to non-listed warehouses."
A second warehouse source estimated the 14 Pacorini warehouses could store up to 850,000 tonnes of metal, in addition to the millions already in Vlissingen. "It shows you something about their capacity to grow the monster," he said.
It is difficult to quantify the exact total of metal going off exchange, said Colin Hamilton, head of commodities research at Australian bank Macquarie.
But it is an attractive option to firms involved in the financing deals known as cash and carry.
In such deals an investor borrows money at low rates to buy physical aluminium, strikes a warehouse deal to store it cheaply and takes advantage of the market's normal "contango" structure of forward prices being higher than nearby ones to sell it forward immediately at a profit.
"This has been an ongoing trend over recent history, given the low warehousing costs off-exchange, and effectively increases the annuity yield of cash and carry financing," Hamilton said in a research note.
"Given this, the LME is no longer necessarily the first option for material delivery."
Most of the roughly 5 million tonnes of aluminium in LME warehouses is locked up in such financing deals.
"We're seeing a redistribution of LME stocks and stock moving off exchange. There is nothing wrong with it, the companies are well within their rights, but it doesn't help the LME's relevance to the market," Hamilton told Reuters.
(Additional reporting by Alexander Winning in London; Editing by Veronica Brown and Anthony Barker)
((susan.thomas@thomsonreuters.com)(44-7919627932)(44-207 542 6880)(Reuters Messaging: Reuters messaging: susan.thomas.thomsonreuters.com@reuters.net))
Keywords: LME/WAREHOUSING