The London Metal Exchange’s potential ban on Russian metals would be a tectonic shift for the metals industry, with some of the largest companies in the world being cut off from the primary global market […]
The office has still not decided whether to ban the import of Russian metals, but on Thursday announced an official series of open-ended debates on the issue, likely to happen as soon as next month.
In practice, it would mean that metal that accounts for approximately 9 % of global nickel production, 5 % of aluminium, and 4 percent of copper could not be shipped to any warehouses in the LME network, which stores metal that is used in transactions against the expiry of futures contracts.
The debate and ensuing fallout make for an exemplary case study showing how deeply the LME is entwined with the entire physical metals industry. Despite its being run by Hong Kong Exchanges & Clearing Ltd, the exchange’s decisions have far-reaching consequences for the manner in which metal is valued and traded.
Most of the metal sold in the world is sold from producers to traders and consumers without being stored in an LME warehouse. Metal producers, including top Russian groups MMC Norilsk Nickel PLC and United Co Rusal PLC, typically do not sell their metal directly to LME. Nevertheless, these exchanges play a crucial role.
In the first place, it’s an established marketplace for the physical metals industry for storing its stocks in LME warehouses. Securities for use in industrial applications can be drawn down in moments of shortage, and in during high demand, excess inventories can be delivered to the LME.
Traders had lately been getting anxious in anticipation of an imminent supply glut in aluminium, particularly for sheet and rod, in response to concerns about the global economy . Because some sellers have chosen to not transport Russian aluminum, mining companies had predicted substantial inflow of rod, which traders anticipated to be substantial.
As of recently, Rusal has ruled out delivering large quantities of its metal to the exchange. Should the LME decide against welcoming new deliveries of Rusal aluminium, that would remove any possible overhang of stock.
When Bloomberg first had a report on LME filings a month ago, the aluminium price jumped as much as 8.5%, the biggest intraday rise on record due to traders who had been expecting an influx of Russian metal rushing to reverse their short positions. As of Friday, the stability didn’t threaten 15 months’ lows.
It’s highly unlikely that this action by the LMEY will turn out as the LME thought . Russian metal, which several of these customers have traditionally rejected, would almost certainly flood global exchanges and cause their metal prices to cease functioning as references.
As a matter of fact, one of the reasons it’s considering a speedy roll-out of any possible ban is if we adopt speedy any decision, we could produce a rush by holders of Russian metal to market it at the stock exchange prior to the sanctions impact.
Any action from the LME would also have effects beyond the warehouse flows. For example, some contracts between exporters, suppliers, and customers stipulate that the metal must be offered for LME delivery, which means that a change to the LME could violate contracts.
Banks suggest that the metal they finance must be delivered in LME condition, in order to make certain that, if there is a mishap, it can easily be sold on the open market. And many traders may take advantage of the metal-delivery capacity to LME warehouses that they provide in their LME contracts as a way of closing physical-inventory hedges at will.
A move by the LME may impact Nornickel and Rusal, their most important customers, as well as Glencore. Glencore PLC, in particular, has an extended multi-year contract to buy commodity-grade aluminium from Rusal.
