Traders are demanding that the London Metal Exchange (LME) stop accepting Russian metals. They fear that the reluctance of buyers to purchase them will lead to an excess of Russian aluminum, copper, and nickel in the warehouses of the exchange, and this will distort market prices.
Sellers and buyers will gather in London next week for the annual LME Week meeting to finalize the terms of contracts for next year. For many, the question is whether to continue working with Russian companies. A possible ban on the acceptance of their metals causes many buyers to deliberately refuse transactions.
“Consumers are telling LME: ‘Your contract is not suitable for us now, we are introducing self-sanctions on Russian products,’” says Colin Hamilton, commodities analyst at BMO Capital Markets.
Russia produces 6% of the world’s aluminum, 5% of copper and 7% of nickel.
LME finds itself in a difficult position and needs to find a solution quickly. It plays a central role in keeping the market running, providing metals from its warehouses when there is a shortage or accepting them when there is an oversupply. If it continues to accept Russian products, but they don’t buy them, the warehouses will be overstocked. Information about their occupancy is one of the factors that traders take into account when determining prices. The LME fears that the market price will begin to reflect an influx of cheap, unclaimed Russian metals, rather than real transactions between buyers and sellers.
Many of the deals they enter into directly already offer a premium on transactions that do not include supplies from Russia. Thus, Chilean Codelco, the world’s largest copper producer, offered to sell its metal at $235 per tonne more than the benchmark contract traded on the LME – a three-month futures contract, which costs almost $7,450, said a person familiar with the situation.
There are signs on the market that Russian producers are proactive and trying to deliver metals to stock exchange warehouses before restrictions are imposed. So, since last Friday, aluminum stocks in LME warehouses have increased by 200,000 tons – this is an unusually large volume. “Obviously the market is nervous, thinking there’s going to be a lot of supply coming from Russia,” Hamilton says.
Having realized that more market participants do not want to work with Russian metals than it previously thought, LME recently put forward three options for their discussion:
- leave everything as it is;
- ban Russian products;
- set a limit on the acceptance of Russian metals into their warehouses.
According to traders, the third option will be the most difficult to implement. They must submit their opinions by October 28.
Some companies, such as the US-based Alcoa, have proposed banning supplies of Russian aluminum, but Rusal said this would lead to increased market volatility.
The LME ban will call into question the ability to work with Russian suppliers under existing contracts and financing agreements, because both types of documents usually include a condition on the possibility of accepting metal at LME warehouses.
The exchange declined to comment, but in a document submitted for discussion, it calls the need to find a balanced solution “a matter of paramount importance.”
Last week, the price of aluminum on the LME jumped sharply on rumors about the possible introduction of US sanctions, but then fell back. According to two market participants, Washington was considering measures against Russian aluminum by banning supplies to the United States, increasing duties or imposing sanctions against Rusal. But any decision is still a long way off, says an American official: “We are always looking at options, but there is no movement on this issue right now.”