The scrap metal industry is putting up a fight against a proposed bill that would ban companies from paying for scrap in cash, saying the measure would redirect trade to the black market.

Graham Jones, a member of parliament for Labour, proposed the changes in November to combat metal theft, including tougher punishments for thieves, CCTV on scrap yards and mandatory ID checks. The bill will go to lawmakers again on January 20.

Chancellor George Osborne pledged 5 million pounds to fighting metal theft last week, but the government has not mentioned cashless payments so far. Jones expects the government to introduce alternative legislation.

This is our one opportunity to introduce cashless payments, and we've got to be ahead of the game, Jones told Reuters in an interview, adding that he was particularly worried about rail and electricity networks ahead of the 2012 London Olympic Games.

The British Metal Recycling Association, an industry body with 300 members who process over 95 percent of Britain's scrap, supports more stringent laws on metal theft but opposes the cashless system.

Now if you introduced a ban on cash tomorrow, the effect of that would be that the legal trade would just siphon away into the illegal yards, said Director General Ian Hetherington. There are up to 1,000 unlicensed yards in the UK.

Derek Campbell, general manager, sales and marketing at SIMS, the world's biggest metals recycler, said: We do a lot of cash transactions. There are many bona fide people out there collecting scrap.

Our issue is we've got to stamp out these illegal operations in the first instance.

The volume of metal recycled in Britain dipped to 13 million tonnes in 2010 from around 15 million tonnes in 2007 as industrial production scaled down, resulting in lower volumes of industrial scrap.

The other major areas of scrap generation are from such things as end-of-life vehicles. I know the motor industry has recovered somewhat, but nevertheless sales volumes are still down on their peak, said the BMRA's Hetherington.

THEFT DOUBLES

Over the past 12 months, meanwhile, metal theft in Britain has doubled as thieves take advantage of high metals prices, according to the Energy Networks Association (ENA).

The Scrap Metal Dealers Act is completely out of date ... it is not in any way designed for an age where we have copper prices and other metal prices at record levels, said Tony Glover of the ENA.

Since January 2009, the price of benchmark three-month copper, a popular choice for metal thieves, has increased by 158 percent on the London Metals Exchange (LME).

Belgium brought in a law banning cash payments of more than 1,000 euros for scrap in 2009 but repealed the law in 2010. A recent law demands dealers ask for ID and maintain records of sellers.

In July, France passed a law that all payments for scrap metal should be cashless and that any payment over 450 euros must be made by bank transfer. Previously, 80 percent of payments for metals in France were made in cash.

In August, Spanish scrap collectors staged a protest in Madrid against a new law that requires them to get a licence and declares all discarded material in public places as property of the council.

Many legitimate yards already adhere voluntarily to other regulations such as ID checks but worry that cashless payments will harm trade. One fifth of the 5 billion pound-a-year industry is carried out in cash, according to Jones.

There's an easy solution, and it's disappointing if scrap dealers don't accept this as a solution as it's been shown to work in other countries, said Ollie Wilson, director of communications at the Country Land and Business Association, which is calling on the government to ban cash payments.

A spokesman for the Home Office said the government acknowledges legislation is the most effective way to tackle metal theft.

Legislation is a last resort. We believe we are at that stage, he said, adding that the government is consulting various parties about how to proceed.

Legislation is a pretty serious measure, so we're not going to rush into it.

(Editing by Jane Baird)