COLUMN-Copper today, aluminum tomorrow? LME’s Russian Dilemma: Andy Home


By Andy Home

LONDON, October 12 (Reuters)More than 60% of the copper stored at the end of September in the warehouses of the London Metal Exchange (LME) was produced in Russia.

The proportion of Russian metals increased from less than 30% at the end of March to more than 80% in May and August following Moscow’s “special military operation” in Ukraine.

Such a high ratio is not unprecedented and continued inventory cancellations and withdrawals suggest many buyers are accepting it against 2022 contracts in the absence of official sanctions.

But what if that changes? Annual supply contracts are being negotiated and at least some buyers are self-sanctioning by specifying no Russian metal in 2023.

Large amounts of unsold Russian metals, especially aluminium, could end up on the market of last resort and the LME is concerned enough to have issued a discussion paper on whether to suspend all deliveries.

COPPER FLUX

The proportion of Russian copper in LME inventories was actually higher in the third quarter of 2021, when it reached 95% of live tonnage, according to LME data.

However, the sharp increase since March is striking, especially since Russian aluminum and nickel inventories have been low and little changed over the same period.

Two of the busiest LME copper storage locations this year have been Hamburg and Rotterdam, ideally located for Russian shipping companies. The two ports have received a total of 100,000 tonnes of copper since early March, nearly a third of the total inflow.

What entered the LME hangars largely turned around and left. Hamburg’s copper stocks, for example, only increased by 6,800 tonnes at the start of January, despite nearly 50,000 tonnes inflows.

Until last month, Russian copper had escaped the official sanctions net, meaning users could legally continue to accept it against contracts for the “LME deliverable” metal.

However, the British government in September announced sanctions and an asset freeze on Iskander Makhmudov, the majority shareholder of UMMC, one of Russia’s two main copper producers, according to the LME, which has severely restricted the ability to underwrite either of UMMC’s two brands.

With only Nornickel still completely unlicensed, the amount of potentially deliverable Russian copper is greatly reduced.

Plus, there’s an obvious destination for any unsold Russian copper next year. China remains an avid commercial and strategic buyer and is likely to grab what others don’t want, especially if it comes with a good price.

ALUMINUM THREAT

The same cannot be said for aluminum. China is by far the world’s largest producer and a large net exporter.

To be sure, power rationing has limited China’s output over the past two years and the country has imported significant amounts of primary aluminum in 2020 and 2021.

But the dynamics of the domestic market have changed again this year and imports have fallen by 71% to 298,000 tons in January-August against 1.03 million tons in the same period of 2021.

With Chinese banks wary of financing Russian equipment, the country is unlikely to be able to absorb Rusal’s four million tonnes of annual production for an extended period.

It is no coincidence that the issue of Russian deliverability has been high on the LME agenda since an aluminum industry meeting in Barcelona, ​​where it was question of who will accept, and more importantly, who will not accept Russian metal in their 2023 contracts.

Rusal has just announced a reshuffle in sales management and says its order book is “strong and the company has no need to deliver metal to LME warehouses”.

PRICE PROBLEM

Rusal, which has become a major supplier of “green” aluminum, warns that suspending its brands in the current low inventory environment would create increased price volatility and physical premiums.

It would also lead to a reduction in the price of Russian metal relative to the LME price, creating an unpredictable ripple effect along a physical supply chain whose prices are based on deliverable marks on the exchange.

The flip side is that if there was an influx of Russian aluminium, copper or nickel into LME warehouses due to a lack of buyers, the LME contract would price the discount.

Such a scenario “could threaten the orderly nature of LME markets, and in particular its key role in price discovery for the global physical industry,” the LME noted.

But so would the suspension of Russian metal ahead of official sanctions, which is the dilemma the LME currently faces.

“A failure to act now could mean that the LME’s hands will be tied in the future, when any move to remedy the situation could be undermined by the volume of Russian metal already under mandate,” he said. .

It is expected that market input will be solicited alongside the annual supply contract negotiations for next year.

The three options are to do nothing, set thresholds for Russian metal deliveries, or suspend all warrants at all sites. The thresholds are likely too complex, the LME concedes, leaving a binary choice, but with another subset of questions as to how much notice period should precede a suspension.

DILEMMA

Asking the market is a good idea since it is the degree of “self-sanction” that will determine whether there will be a surplus of unsold Russian metal in the first place.

Getting consensus could be a lot trickier, as there are obviously a lot of self-interests on both sides, especially in aluminum, where Western producers and Rusal have already clashed over changes to warehouse loading rules. LME.

Rusal’s legal challenge at the time is a reminder that any unilateral move by the LME can also be legally burdensome.

Moreover, the metals debate could be changed at any moment by the triggering of government sanctions such as those that Britain has just imposed on the owner of UMMC or the ban by the European Union in April on imports of Russian lead.

Unfortunately for the LME, the question mark over future sanctions against the Russian metal simply highlights the dilemma of whether to go early or risk going too late.

The opinions expressed here are those of the author, columnist for Reuters.

The ratio of Russian copper in LME stocks has surged this yearhttps://tmsnrt.rs/3VdUD0W

Russian aluminum currently accounts for around 20% of LME stockshttps://tmsnrt.rs/3EEpNJ0

Russian copper piling up in LME warehouses – sources

(Edited by Alexander Smith)

((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.




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