CHARTS: The coming critical minerals trade war is BRICS short of a load
"While a large number of countries around the world continue to talk about securing raw material supply, China is actually doing something about it."
It’s clear the London Metal Exchange (LME) isn’t going to be rushed into any decision on whether to continue accepting Russian metal against its contracts.
A discussion paper on the possibility of suspending Russian brands is “an option currently under active consideration,” it said. But the exchange hasn’t actually decided yet whether to issue such a paper.
Given the LME’s protracted rule-making process – a discussion paper followed by a consultation paper followed by legal notice – there seems little prospect of an imminent change in the status of Russian metal.
The LME has already tweaked its rules slightly to abide by the limited government sanctions on Russian metal in the wake of the Kremlin’s self-styled “special military operation” in Ukraine.
Metals players choosing to impose their own sanctions, so-called self-sanctioning, could have a much larger impact on Russian flows of aluminum, copper, and nickel next year but it will be the market itself that determines whether the exchange needs to adjust its delivery rules.
Government sanctions against Russia have largely spared its base metals producers.
The European Union prohibited the import of Russian lead in April, prompting the LME to suspend the warranting of the “FRGT PB985R” brand produced by Fregat LLC. Luckily, LME stocks of such metal were zero at the time.
The British government’s imposition of a 35% penalty duty on Russian imports of aluminum, copper, lead and nickel necessitated a suspension of Russian-brand deliveries to LME warehouses in the country. Luckily again, there was no Russian metal in either Liverpool or Hull at the time.
Export flows from Rusal’s aluminum smelters and Nornickel’s nickel and copper mines have been left untouched even as the oligarchs behind them have been hit by sanctions.
Western policy-makers have been wary of repeating the mistake of 2018 when temporary sanctions on Rusal roiled both physical supply chains and exchange pricing.
Voluntary self-sanctioning, however, could be a much bigger issue.
Many physical buyers have continued accepting Russian metal this year, the lack of official sanctions providing legal cover for honoring existing contracts.
However, entering into a new 2023 supply deal with a Russian entity is a very different thing, and several large aluminum users such as Novelis, a division of Hindalco Industries and Norsk Hydro’s extrusions unit have already said they won’t take Russian material.
The scale of the potential boycott is difficult to assess. Most 2023 supply contracts tend to be concluded around LME Week, the industry’s annual get-together which will start on Oct. 24 this year.
But who is and isn’t going to buy Russian metal was evidently the hot topic at Fastmarkets’ aluminum conference in Barcelona last month.
Rusal, which accounts for around 6% of global aluminum production, maintains that it’s business as usual in terms of negotiating 2023 contracts and that it has no intention of dumping large amounts of metal into the LME warehouse system.
That, though, is the fear, not just among aluminum traders but also in both nickel and copper markets, where Russian supply is equally significant.
If metal can’t be channeled down traditional sales channels, there will at the very least be a supply bulge before alternative markets can be found.
Financing metal stocks is already challenging as banks navigate fast-changing currency and interest-rate markets. Financing unsold Russian metal would be harder still with many banks also voluntarily self-sanctioning.
It’s easy to understand why market participants are starting to sketch out a scenario of mass deliveries to the market as last resort.
It’s happened before. LME aluminum stocks mushroomed after the global financial crisis and by March 2013 there were 2.5 million tonnes of inventory in the system categorized as Eastern European or former the Soviet Union.
The potential problem facing the LME is that a deluge of Russian metal into its warehouse network would shift the basis of exchange pricing from global to Russian.
Since Russian metal is already trading at discount to LME prices, the logical outcome would be for LME pricing to reflect that discount to the “real” price.
It wouldn’t be the first time such a dislocation has been created by the LME’s deliverability rules.
Consider the long warehouse load-out queues that dogged the aluminum market in the middle of the last decade. They caused the LME price to trade at a cost-of-queue discount to the physical market, manifesting in soaring physical premiums and a split in the “all-in” price.
The LME aluminum market wasn’t disorderly in the way that the exchange uses the word to denote a breakdown in trading such as in nickel earlier this year. But it wasn’t orderly in terms of the larger supply chain.
Neither the aluminum market nor the LME needs a repeat of this sorry saga, which attracted both a slew of negative headlines and the unwelcome interest of U.S. regulators.
That said, the LME is right to kick the Russian can down the road.
Right now, we don’t know how big a problem the self-sanctioning movement poses for Russia’s metal producers. The answer will only emerge gradually over the next few weeks as buyers lock in contracts for next year’s shipments.
Even then, we won’t know how easy or hard it will be for Russian operators to divert exports into other markets, China being just one obvious destination.
It’s possible that physical flows will simply reconfigure and there will be no need for physical deliveries to LME warehouses.
It’s also possible that the official sanctions net might tighten, particularly if US and European policy-makers see consumers turning away from Russian supply anyway.
There are a lot of variables at work here and the LME is in a difficult position if it tries to pre-empt government sanctions using its own “orderly market” regulations
Best, maybe, to think about asking the entire market about its views on whether to suspend Russian metal.
At some stage.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
(Editing by David Evans)
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