Russia aluminum giant weighs selling directly on London Metal Exchange

What Rusal will do with its excess production is one of the hottest topics of discussion among metal traders, with some fearing that large deliveries to the exchange could cause LME prices to diverge from the global aluminum market.

Rusal has discussed shipping some aluminum from Russia’s far eastern port of Vladivostok to LME warehouses in Asia, according to people familiar with the matter, who asked not to be named as the matter is private.

The company is currently only considering delivering a small portion of its production as a pilot test, said some of the people, as it is mindful that large inflows into LME inventories could push down prices. Rusal is the largest producer outside China of the lightweight metal used in everything from fizzy drinks cans to airplanes.

Rusal didn’t immediately respond to a request for comment.

Producers like Rusal typically prefer to sell their output on long-term contracts to processors and end users, with any excess volumes sold to commodity traders. Rusal’s largest customer is Glencore Plc, which buys its aluminum under a multiyear supply deal that was renewed in 2020.

LME inventories generally rise when global economic growth slows, particularly in the aluminum market where it is costly for smelters to shut down production. But it’s unusual for a big smelter to deliver and sell its metal directly on to the exchange — known as “direct warranting” — since it risks pushing down the LME price, which is used as a benchmark for all sales.

The LME does not have warehouses in major metal producing countries, in part to discourage producers from dumping their metal on the exchange.

A move by Rusal to sell significant volumes of its metal on the LME could cause a fresh headache for the exchange, already under fire from users over its handling of a massive short squeeze in nickel earlier this year. If the exchange becomes a dumping ground for metal that a significant proportion of real world consumers are unwilling to buy, the LME could diverge from prices in the physical market, reducing the utility of the exchange for users who rely on it as a global benchmark.

The LME said it will keep the situation under constant review as it prioritizes maintaining an orderly market. The exchange does not currently see any evidence of LME warehouses being used to “offload metal on a long term basis,” it said.

LME aluminum inventories have risen in recent weeks, due to deliveries at Singapore and at Port Klang in Malaysia. That was largely due to inflows of Indian metal rather than deliveries by Rusal, according to people familiar.

(By Alfred Cang, Jack Farchy and Mark Burton, with assistance from Archie Hunter)