Traders are pushing the London Metal Exchange to stop accepting Russian metal, fearing its warehouses will become a stockpile for unwanted material that distorts global prices for commodities like aluminium and copper.
The push has pitted users of the world’s largest metals exchange against each other and comes at a critical time, as metal producers and buyers gather in London next week to finalise their contracts for supplies for the year ahead.
For the exchange, the dilemma constitutes another problem in a challenging year in which it has enraged some of its biggest users. It is already facing lawsuits from hedge fund Elliott Management and market maker Jane Street over its decision to cancel several hours’ worth of nickel contracts during a historic surge in prices in March.
Its latest difficulty comes as large trading houses like Glencore are deciding whether to renew their long-term contracts with Russian producers. With the industry preparing for next week’s annual LME Week get-together, the uncertainty over a ban means that many purchasers are deliberately staying away from deals that may involve Russian metals.
“Consumers are saying to the LME, ‘Your contract is not fit for us at the moment, we are self-sanctioning Russian material, we don’t want to dip into the LME warrant pool and pull out a warrant for Russian material’,” said Colin Hamilton, commodities analyst at BMO Capital Markets.
Traders said that puts the LME into a difficult position that needs urgent resolution. It plays a critical role in the daily functioning of the market, supplying metals when there is a shortfall or accepting it into its warehouses when there is an excess. Russia produces 6 per cent of the world’s aluminium, 5 per cent of copper, and 7 per cent of nickel.
If it continues to accept unwanted Russian material into its warehouses but many of its users shun it, it will create a stockpile.
The exchange is worried that the price on its market would reflect the glut of cheap, unwanted Russian metal it holds and not the price charged in deals that are cut directly between producers and consumers.
Many of the private deals are already including a premium on the price for transactions that do not include metal supplied from Russia. Chile’s Codelco, the world’s top producer of copper, has offered to sell its metal for $235 per tonne above the LME benchmark three-month contract, which trades at almost $7,450 per tonne, according to a person familiar with the matter.
A mismatch would undermine the LME’s role as a marketplace that set a fair and accurate market price.
Moreover there are signs that Russian producers are trying to get ahead of any future restrictions by increasing their deliveries to LME warehouses.
Since Friday about 200,000 tonnes of aluminium have entered LME warehouses — an unusually high level. While much of the material appeared to come from India, it has stoked fears about a build-up of Russian material.
“The market is clearly nervous that there is a big delivery of Russian material coming,” said Hamilton.
In an effort to resolve the problem, the LME set out three options for its users in a discussion paper this month, after it became apparent to the exchange that more users might be shunning Russian metal than it had previously believed.
According to the LME’s three possible scenarios, it can continue as usual, implement a ban or set volume limits on the amount of Russian material that can be accepted into warehouses. Traders conceded that the third route would technically be the most difficult to implement. Market participants have been given until October 28 to provide feedback.
Companies like US aluminium producer Alcoa have led calls for a ban but Russian rival Rusal has warned the move would fuel volatility in the market.
An LME ban could jeopardise Russian producers’ supply contracts with buyers and their financing arrangements with lenders, given that both often require metal to be able to be deposited to LME warehouses.
Other LME users bristle at the principle of a private company moving ahead of any formal government sanctions.
“The pattern of sanctions should be owned by governments. It would be wrong personally for an institution to decide,” said one trading executive.
The LME declined to comment but noted in its discussion paper that finding the appropriate balance of action is “paramount”.
To date western governments have avoided comprehensive sanctions on Russian metal, in part because its supply of crucial industrial metals would be difficult to replace and the effect would spill over into western economies.
Two market sources said Joe Biden’s administration was considering whether to target Russian aluminium through a US ban, raising tariffs, or putting sanctions on Rusal, the largest producer of the metal in Russia. But a US official cautioned that no decision was close. “We are always considering options but nothing is moving on this imminently,” a US official said.
Any US sanction on Russian exports of aluminium, which is used in aircraft, weaponry, cars and drink cans, would have far-reaching implications for global metals trading.
The price of the benchmark aluminium contract on the LME gained sharply last week on reports of the US considering sanctions before paring back to $2,171 per tonne. That is well above its average price over the previous decade but down by almost half from its peak in March.
“The LME discussion paper sends the ball back into governments’ side of the court,” said Tommy Bain, Marex’s head warrant trader and chair of the LME warehousing committee. “Without sanctions by the US, the LME is caught between a rock and a hard place.”