Speculation that the United States is considering banning aluminum from Russia contributed to a brief spike in metal prices a week ago, but some consumers have already voluntarily chosen to avoid the country’s metals.
This has led the London Metal Exchange (LME) to consider options to circumvent trade distortions potentially caused by a buildup of metals from Russia in its warehouses.
Reports last week said the United States was considering a possible ban, restrictions, increased tariffs on aluminum imports from Russia or the sanctioning of Russian aluminum producer United Co Rusal, in response to the military escalation of the war in Ukraine.
“There is certainly chatter in the aluminum market, but a lack of clarity only contributes to the uncertainty that keeps some buyers on the sidelines,” said Christopher Davis, director of price reports, Americas. , from S&P Global Commodity Insights. “Some think tariffs could be applied,” he said. It would be “less drastic than sanctions or a total ban, which would have a greater impact”.
In early March, aluminum producer Alcoa Corp. YY,
said he would stop buying raw materials from, and selling its products to Russian companies in response to the country’s invasion of Ukraine. Some reports last week indicated that Alcoa had asked the White House to stop US imports of aluminum from Russia.
The LME published a working paper on Russian metal on October 6 and said it was “closely monitoring the use and flow of Russian metal on the LME, to ensure that LME warehouses do not see a large influx of unwanted Russian stocks, which could create a market disorderly or unfair”.
He listed three options to help deal with growing concerns about the “threat to market order.”
“If the underlying physical aluminum market got to the point where the vast majority were not accepting the Russian metal, then these tonnes wouldn’t be representative of the market as a whole,” Davis of S&P Global said. So there is a “market opinion that the LME would be more likely to delist it.
Wednesday, the LME Aluminum Spot Bid Price was $2,168 per metric ton, down from $2,373.50 on October 13, the day after reports of a possible U.S. ban on the metal from Russia.
For now, there seems to be enough adoption and Russian metal remains viable, Davis said. Next year, however, there may be more consumers who have decided not to accept additional Russian hardware and the LME may decide to take formal action, he said.
The LME has listed its first option to address growing concerns as maintaining the current stance, with no further action until international governments impose sanctions on Russian metals, or stocks and price data show a guaranteed impact of Russian metal on prices. Warrants represent the right to a specific lot of metal approved by the LME.
The LME said it could also introduce thresholds for Russian metal backed. If, for example, Russian metals constitute a specified percentage of the stock under mandate for a metal, the LME would suspend further deliveries. The last option would be the suspension of the guarantee of Russian metal in LME warehouses around the world, which could cause market disruption in the short term, but would bring certainty to the market, LME said.
“Given that Russia accounts for around 5% of global aluminum production, the metals would be one of the hardest hit should we see a ban or limits on Russian deliveries to LME warehouses,” he recently wrote. Ewa Manthey, commodities strategist at ING. comment. Russian aluminum has accounted for up to three-quarters of LME stocks over the past decade, she said. “Clearly, the LME is concerned about the risk of Russian metal being dumped into LME warehouses as buyers become less willing to accept Russian metals for next year’s supplies.”
““Clearly, the LME is concerned about the risk of Russian metal being dumped into LME warehouses as buyers become less willing to accept Russian metals for next year’s supplies.” ”
Manthey thinks a total ban on Russian metals would be the most optimistic outcome of the LME working paper – “effectively cutting Russian metals off the exchange.”
LME warehouses are also “filling up rapidly” with Russian copper since the conflict began in late February, said Ronnie Cecil, senior analyst, metals and mining at S&P Global Commodity Insights. Any potential bans by the LME or the US government on imports from Russia are likely to “increase upward pressure on prices”.
Jason Sappor, Cecil’s colleague at S&P Global, a senior metals and mining research analyst, said LME nickel prices found support this month as the exchange considered banning delivery of nickel. new Russian nickel in its warehouses.
“Self-sanctioning” by consumers of nickel produced by Russia’s Norilsk Nickel for 2023 annual contracts, during the current so-called “mating season” trading period that runs from September to the end of year, “could push the company to deliver excess metal to LME warehouses and drive down LME nickel prices,” Sappor said. Self-sanction refers to buyers who voluntarily avoid Russian metals given the uncertainties surrounding them.
Even so, Russia is likely to find a willing buyer in China, especially for aluminum.
“The question is whether a ban or sanctions on Russian aluminum would produce the effects desired by the Biden administration,” said Jeff Klearman, portfolio manager at GraniteShares, which offers the GraniteShares Bloomberg Commodity Broad Strategy No K- 1 COMB,
an exchange-traded fund that offers broad exposure to commodities.
For example, Russia could “avoid the repercussions of a US ban by selling aluminum to China, at a reduced price, and then China would sell its aluminum production to the United States at a higher price”, did he declare.
Russia is a major aluminum producer, and steps taken to effectively eliminate Russian aluminum from the market will likely raise aluminum prices and thus contribute to higher levels of inflation, Klearman said.
Given that, the Biden administration might be reluctant to implement a ban, “especially during the midterm elections,” he said.