Most of the two dozen market participants surveyed by Bloomberg expect higher prices for aluminum, copper and nickel when the LME markets reopen Monday morning at 1 a.m. London time .
But there is disagreement over the broader impact of the move: some say the withdrawal of one of the largest producers from the market will lead to higher prices, while others focus on the prospect of an influx old Russian metals – which is still allowed – dumped on the LME.
Many dealers and brokers spent the weekend at work assessing the market implications of the sanctions. The timing of this news, just before the annual CESCO Week gathering of the global copper industry in Chile, also led to lively conversations in business class cabins and in passport queues as as industry descends towards Santiago. In London, headquarters of the LME, traders are preparing for a wild Sunday evening, glued to their screens.
The scenes will be familiar: metals traders are inured to wild swings and long weekends after a period marked by a nickel short squeeze that nearly destroyed the LME in March 2022 and sanctions against United Co Rusal International PJSC which wreaked havoc in 2018.
But traders and executives said the new restrictions were unlikely to have as dramatic an impact as those two events. The two Russian metals giants, Rusal and MMC Norilsk Nickel PJSC, are much 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 of sanctions.
Russia nevertheless remains a significant producer, representing 6% of the world’s nickel supply, 5% of aluminum and 4% of copper. And its role at the LME is even more important: in nickel for example, Nornickel has long been the largest supplier of refined metal, which is the only form deliverable to the LME.
As a result, traders expected prices to rise Monday morning, although forecasts for increases ranged from a few percent to 10 percent. Since the nickel crisis, the LME has implemented daily limits that prevent copper and aluminum prices from rising more than 12% in a day, while nickel is limited to 15%.
The escalation of hostilities in the Middle East could also fuel volatility.
“In terms of price, the natural bias will be higher,” said Alastair Munro, a broker at the London-based Marex Group. “But on the other hand, it will be interesting to see if any funds or traders have to reduce their positioning due to the increasing volatility.”
Divided market
By targeting supplies of Russian metal produced from April 13, the sanctions divide the market into three categories: new Russian metal, delivery of which to the LME is now blocked; old Russian metal, produced before April 13; and non-Russian metal.
BloombergThe LME confirmed on Saturday that the “old” Russian metal can continue to be delivered, although the exchange said it would require proof that the metal did not violate sanctions and would approve deliveries on a case-by-case basis. case.
The LME’s approach actually only strengthens the restrictions imposed by the United States and the United Kingdom on Friday.
But it is likely to reignite debate over whether the Russian metal should be banned altogether in order to protect the exchange’s role as the home of global benchmark prices: by continuing to allow Russian supplies, it is It is likely that LME prices will increasingly become those of the “old markets”. “Russian metal.
The Russian metal already represented 91% of LME aluminum stocks, 62% of copper and 36% of nickel at the end of March. Traders are now expecting a wave of deliveries of Russian hardware held outside the LME system, which could now be dumped on the exchange as its owners worry about the prospect of future restrictions.
In the aluminum market, estimates of the amount of Russian metal held outside the LME system range from a few hundred thousand tonnes to a million tonnes.
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.
Limited swimming pool
A wave of Russian supply would likely push spot prices lower relative to futures — a situation known as contango, which generally indicates a well-supplied market. Contangos for copper, aluminum and nickel are already at historically high levels, partly due to the growing share of the Russian metal on the exchange, which only a limited group of consumers, traders and brokers are ready to to touch.
For its part, the LME considered banning the Russian metal in 2022 and decided not to do so, arguing that it was still consumed on the physical market and that it was not up to it to act beyond sanctions requirements.
On Saturday, it said it would keep the position under review, but noted that traders had continued to take delivery of Russian aluminum from LME warehouses in January, February and March.
The new rules announced Friday also include a provision that will make it easier for traders to take delivery of the old Russian metal. While a previous set of metals sanctions announced by the UK in December originally banned UK citizens from requesting delivery of Russian metal to the LME, the government has now removed this restriction as long as the metal was already in the stock market system before April 13.
When markets open in a few hours, traders say they expect copper, aluminum and nickel to react in distinct ways. The price reaction will likely be most extreme in the case of nickel, said Colin Hamilton, managing director of commodities research at BMO Capital Markets.
“There’s definitely going to be some degree of panic in the initial reaction, and nickel is probably the metal where we’ll see it most clearly,” he said. However, “markets tend to adapt quite quickly to these types of shocks”.
