According to ING (Netherlands International Group) on April 15, 2024, following the sanctions imposed by the United States and the United Kingdom on Russia due to its invasion of Ukraine, the London Metal Exchange has banned the delivery of new Russian metals. What does this mean for global metal trade?
1. Metal prices will rise in the short term, but there is a limit.
From April 13th onwards, Russian nickel, aluminum, and copper produced will not qualify for delivery to the LME or the Chicago Mercantile Exchange (CME). The United States has also banned the import of all three metals from Russia.
Russia accounts for approximately 6% of the world's nickel production, 5% of aluminum, and 4% of copper. Regarding nickel, Russia is the world's second-largest producer of refined primary nickel, second only to China, with primary nickel being the only type deliverable on the LME.
Russia is a major producer of refined primary nickel.
The impact on supply in the United States is expected to be minimal. For instance, the U.S. has never been heavily reliant on Russian aluminum, with Russian imports making up less than 1% of U.S. aluminum imports. However, this move could affect the global trade of metals.
This move will benefit LME prices, which serve as a benchmark for global contracts. The LME nickel price, in particular, remains susceptible to significant price increases following the supply tightness caused by Russia's invasion of Ukraine in March 2022 and the increase in short positions on the exchange. However, the LME has set daily limits to prevent the price of copper and aluminum from rising more than 12% in a single day, and nickel prices from rising more than 15%.
2. Russian metals will flow to sanction-neutral countries.
The LME is the ultimate market for physical metals. Although the majority of metals traded globally are never delivered to LME warehouses, some contracts stipulate that metals should be deliverable on the LME. This means Russian companies will be forced to accept lower prices. Metals originating from Russia will trade at greater discounts and will continue to flow to sanction-neutral countries, such as China, the world's largest consumer of aluminum. Last year, China's imports of unwrought aluminum from Russia reached a new high, a trend that is likely to continue. China may keep buying discounted Russian materials for domestic use and export its aluminum products to Europe and the United States to fill the gap left by the Russian import ban.
In 2023, China's imports of Russian aluminum reached a historical high.
Source: China Customs, ING Research Department
3. Excess Russian metals will accumulate in LME warehouses.
Before the UK banned the trade of Russian physical metals, including aluminum, nickel, and copper, by British individuals and entities in December last year, Russian metals were essentially unaffected by sanctions. However, the UK included an exemption clause at that time, allowing trading on the LME to continue. The UK was the only European country to take such measures. Initially, UK sanctions prohibited British individuals from requesting the delivery of Russian metals from the LME. However, this restriction has now been lifted as long as the metal was already in the exchange's system before April 13th.
The LME had considered banning Russian metals in 2022 but ultimately decided against it, stating it would be guided by government sanctions. Canada announced a ban on Russian aluminum and steel products in March 2023. Meanwhile, European buyers have been self-sanctioning since the invasion of Ukraine, raising concerns that LME warehouses could be used as a dumping ground for unwanted Russian metals.
As of the end of March, 36% of nickel, 62% of copper, and 91% of aluminum in LME warehouses were from Russia. The LME stated that these existing stocks would not be affected by sanctions and could continue to be delivered. However, the exchange stated it would require proof that these metals did not violate sanctions and would approve deliveries on a case-by-case basis.
Russian aluminum dominates the LME (London Metal Exchange) market.
Source: LME, ING Research Department
A new influx of Russian metal deliveries into LME warehouses could push up the premiums of copper, aluminum, and nickel contracts, indicating ample supply in the short term. This market structure, with futures premiums at historically high levels for these three metals, could further lead to a divergence between LME and actual trading prices.
Ultimately, the new restrictions will not alter the supply-demand balance for these metals. Prices for copper, nickel, and aluminum may initially rise, with the market remaining volatile in the short term due to the immense uncertainty over supply and LME deliveries following the sanctions. However, the market may adjust to the new dynamics, and Russian materials will continue to seek new sanction-neutral buyers.
In 2018, the United States imposed sanctions on Russian aluminum.
Source: LME, ING Research Department
In April 2018, the U.S. government imposed sanctions on Russian aluminum producers. LME prices soared to $2,718 per ton, the highest level since 2011, before gradually declining in the following weeks and months. The sanctions were lifted in January 2019.
Commentaires