Metals come under strain as US, UK sanctions on new Russian supplies shake LME

Metals swung sharply, with aluminum surging to a record high before later erasing most of its gains, as traders digested US and UK sanctions that banned the delivery of new Russian supplies on the London Metal Exchange .

The restrictions on aluminum, nickel and copper announced Friday evening do not prevent Russia from selling its metals to buyers outside the United States or the United Kingdom, and do not restrict the vast majority of global trade metals – which takes place directly between miners, traders and industrialists rather than through the stock exchange.

But sanctions will continue to ripple through metals markets due to the LME’s central position at the heart of the industry. Its prices are used as a benchmark and referenced in a large number of contracts around the world, and many buyers consider the ability to deliver on the LME to be essential.

“While the new restrictions won’t stop Russian metals trading, we could see temporary support for rising prices for copper, aluminum and nickel,” said Amy Gower, metals strategist at Morgan Stanley, in an emailed note. This will be especially true “if banning delivery to LME and CME warehouses makes traders and users less willing to handle Russian material and disrupts broader trade flows.”

Aluminum jumped 9.4% as the market opened in Asian hours, a record since the current form of the contract was launched in 1987, but was up just 1.9% by the end of the day. -noon in London. Nickel rose 0.2%, after climbing as much as 8.8%.

Russia is a major metals producer, accounting for 6% of the world’s nickel supply, 5% of aluminum and 4% of copper. The sanctions aim to limit President Vladimir Putin’s ability to finance his war machine by preventing Russian producers from accessing Western exchanges, while allowing metals to flow to manufacturers in allied countries who depend on them. The restrictions prohibit new Russian deliveries of the three metals to the LME as well as the Chicago Mercantile Exchange, while allowing delivery of the produced metal before April 13. The immediate price action was fueled by “fears that sanctions would reduce Russian flows to Western markets,” said Jia Zheng, head of trading and research at Shanghai Dongwu Jiuying Investment Management Co. “Any stimulus will be amplified in an existing bullish context.”

Metals traders are hardened to wild market swings after a period marked by a nickel short squeeze that nearly destroyed the LME in March 2022 and sanctions against Rusal that wreaked havoc in 2018. However, many traders and executives interviewed by Bloomberg since Friday asserted that Ultimately, new restrictions are unlikely to have as dramatic an impact as these two events.

Russia’s two metals giants, Rusal and MMC Norilsk Nickel PJSC, are far less involved in the Western financial system than they were before the war, and the industry has spent the past two years preparing for the prospect sanctions.

But the moves appear designed to cement China’s status as Moscow’s buyer of last resort, which could leave Russian supplies trading at even deeper discounts to LME benchmark prices.

Both companies have already sold increasing volumes to China as many Western buyers have pulled out, and aluminum giant United Co. Rusal International PJSC said Monday the measures would have no impact on its ability to sell. supply its customers.

The LME’s approach actually only strengthens the restrictions imposed by the United States and the United Kingdom on Friday. She said on Saturday that the “old” Russian metal could continue to be delivered, although the exchange said it would require evidence that the metal did not violate sanctions and would approve deliveries on a case-by-case basis.

The move is likely to reignite debate over whether the Russian metal should be banned altogether to protect the exchange’s role as the home of global benchmark prices.

By continuing to allow Russian supplies, the LME has left open the possibility of a short-term increase in deliveries of this “old” Russian metal to its warehouses, which could in turn create further price disruptions.

At the end of March, Russia already held 91% of the LME’s aluminum stocks, 62% of copper and 36% of nickel. In its notice on Saturday, the LME acknowledged the possibility that uncertainty caused by sanctions could mean “a relatively large supply” of Russian metal could flow onto the exchange.

Estimates of the amount of Russian aluminum held outside the LME system range from a few hundred thousand tonnes to a million tonnes.