Traders are urging the London Metal Exchange to stop accepting Russian metal, fearing its warehouses will become a stockpile of unwanted material disrupting global prices for commodities such as aluminum and copper.
The push has pitted users of the world’s largest metal exchange against each other and comes at a critical time as metal producers and buyers gather in London next week to finalize their supply contracts for the coming year.
For the exchange, the dilemma poses another problem in a challenging year in which it has outraged some of its biggest users. It is already facing lawsuits from hedge fund Elliott Management and market maker Jane Street over its decision to cancel nickel contracts for several hours amid a historic price hike in March.
The final difficulty comes when major trading houses like Glencore decide whether to extend their long-term contracts with Russian producers. As the industry gears up for next week’s annual LME Week meeting, uncertainty over a ban means many buyers are deliberately staying away from deals that may involve Russian metals.
“Consumers are saying to the LME, ‘Your contract is not right for us at the moment, we are disapproving of Russian material ourselves, we don’t want to dive into the LME guarantee pool and issue a warrant for Russian material,’” said Colin Hamilton, commodity analyst at BMO Capital Markets.
Traders said this puts the LME in a difficult position that urgently needs to be resolved. It plays a vital role in the day-to-day operation of the market, supplying metals when there is a shortage or taking it into its warehouses when there is a surplus. Russia produces 6 percent of the world’s aluminum, 5 percent copper and 7 percent nickel.
If it continues to accept unwanted Russian material in its warehouses, but many of its users shun it, it will create a stockpile.
The exchange fears that the price in its market reflects the abundance of cheap, unwanted Russian metal it owns and not the price charged in deals cut directly between producers and consumers.
Many of the private deals already include a premium on the price for transactions that do not include metal supplied from Russia. Chilean Codelco, the world’s largest copper producer, has offered to sell its metal for $235 a tonne above its three-month LME benchmark contract, which trades at nearly $7,450 a tonne, according to a person familiar with the matter.
A mismatch would undermine the LME’s role as a marketplace that sets a fair and accurate market price.
In addition, there are signs that Russian producers are trying to circumvent future restrictions by increasing their deliveries to LME warehouses.
About 200,000 tons of aluminum have entered LME warehouses since Friday – an unusually high level. While much of the material seemed to come from India, it has fueled fears of a build-up of Russian material.
“The market is clearly nervous that a large shipment of Russian material is coming,” said Hamilton.
In an effort to resolve the issue, the LME set out three options for its users in a discussion paper this month after it became clear to the exchange that more users would be avoiding Russian metal than they previously thought.
According to the LME’s three possible scenarios, it can go ahead as usual, introduce a ban or set volume limits on the amount of Russian material that can be accepted in warehouses. Traders admitted that the third route would be technically the most difficult to implement. Market participants have been given until October 28 to provide feedback.
Companies such as US aluminum producer Alcoa have called for a ban, but Russian rival Rusal has warned the move would fuel market volatility.
An LME ban could jeopardize Russian manufacturers’ supply contracts with buyers and their financing arrangements with lenders, as both often require metal to be deposited into LME warehouses.
Other LME users are annoyed by the principle that a private company pre-empts any formal government sanctions.
“The pattern of sanctions must be in the hands of governments. It would be wrong for an institution to decide personally,” said a trade manager.
The LME declined to comment, but noted in its discussion paper that striking the right balance of action is “of paramount importance.”
To date, Western governments have avoided extensive sanctions on Russian metal, in part because the supply of critical industrial metals would be difficult to replace and the effect would spill over to Western economies.
Two market sources said the Joe Biden administration was considering targeting Russian aluminum through a US ban, raising tariffs or imposing sanctions on Rusal, Russia’s largest producer of the metal. But a US official warned that no decision was near. “We’re always considering options, but nothing is coming any time soon,” a US official said.
Any US sanctions on Russia’s exports of aluminum, which is used in aircraft, weapons, cars and drink cans, would have far-reaching consequences for the global trade in metals.
The price of the benchmark aluminum contract on the LME rose sharply last week on reports from the US considering sanctions before falling to $2,171 a tonne. That is well above the average price of the past decade, but by almost half below the high in March.
“The LME discussion paper sends the ball back to the government’s side,” said Tommy Bain, Marex chief warrant trader and chairman of the LME storage committee. “Without US sanctions, the LME is caught between a rock and a hard spot.”