Aluminium and nickel prices rose sharply on Thursday as traders fretted about supply shortages after the London Metal Exchange announced that it was considering banning new Russian metals from entering the market.
The exchange is deciding whether to publish a discussion paper about how to deal with Russian material, according to its chief executive Matthew Chamberlain.
Market participants with knowledge of the plan said the paper would include the possibility of banning new Russian metal from entering the market.
While the UK and Europe have imposed sanctions on Russian oil and coal, no equivalent measures have been taken for metals. Russia accounts for about 20 per cent of global nickel production outside China, and 13 per cent of aluminium production outside China.
Restrictions on Russian metals would be a notable shift from the LME’s previous position of allowing them to trade freely; traders fear that Russian producers might start to unload metal on the exchange.
Aluminium prices rose by 8 per cent on the news, which was first reported by Bloomberg, before dipping to close 2.6 per cent higher than the market open. Nickel, copper and zinc also rose on Thursday.
Chamberlain confirmed the group was considering whether to issue a discussion paper “with the aim of eliciting market views as to the ongoing acceptability of Russian metal in the broader physical market”.
Issuing a paper would be the first step towards the imposition of restrictions. No decision has been taken yet on whether to do so, Chamberlain added.
“If Russian material is unable to come to the LME, it materially tightens the markets,” said Marcus Garvey, head of commodities strategy at Macquarie. “But that is a big ‘if’”.
In March, a squeeze on the LME nickel market — partly due to traders’ fears that Russian nickel production would shrink after the full-scale invasion of Ukraine — resulted in the temporary shutdown of the nickel market and the unwinding of thousands of deals.
The supply of metals such as aluminium and nickel could tighten if the LME does introduce restrictions because it may become more difficult for banks to finance sanctioned commodities, and because traders may be less willing to underwrite deals involving Russian-sourced metal, according to analysts.
Max Layton, commodities analyst at Citi, said that previously the market had expected Russian metal to continue to flow into the LME. “Today we saw a move toward pricing a potential ban on flows,” he said.
However demand for base metals over the next year could drop if there is a deep European recession or a global downturn, he said. “In that world, the excess unit is most likely to be Russian supply.”