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LME checks Russian aluminum game, but is it game over?

Over half of the registered tonnage was canceled the following week, destined for a creative reversal that would see it re-justified under more restrictive trading conditions and tied to a lucrative rent-sharing warehouse contract.

A significant portion of these canceled shares were transferred back to LME warrants last week after the exchange adjusted its new rules for the delivery of Russian metals.

With the increase in physical liquidity, the timeframes have calmed down and the benchmark cash-to-three-month timeframe has returned to contango.

The crisis has been averted, although it remains to be seen whether there will be further twists in the LME's long-standing Russian aluminum story.

The exchange is fortunate that physical buyers, especially Chinese players, are still happy to soak up excess Russian metal.

The Gwangyang Shuffle

The LME stockpile raid focused on the South Korean port of Gwangyang, where 109,125 tonnes of aluminum stocks were canceled in the week of April 15, including a massive 79,850 tonnes on April 15 itself.

Over 90% of all LME warrants were made of Russian-branded metal at the end of March, and much of it was stored in Gwangyang, where about half of all registered holdings are located.

Such warrants, which were already in trading at the time the sanctions were announced, can be traded freely. If they had been removed from the warrant and returned to the LME, they would have come with restrictions on UK and US citizens or legal entities being able to cancel them again or take physical delivery.

Since the metal was likely stuck in the LME system for an extended period of time, it would have generated a revenue stream for the warehouse operator and via a rent-sharing agreement with a renewed guarantee from the company.

The LME has sought to close the potential loophole by making it much easier to convert newly guaranteed Russian metal back to its original free trade status.

The exchange also reminded warehouse operators that rent-sharing arrangements are not permitted if they serve to limit future owners' ability to accept physical deliveries, which appears to have been the premise of this particular warehouse play.

The official warning appears to have had an effect, as 88,625 tonnes of aluminum were re-guaranteed in Gwangyang on May 1st.

Game over?

This may not be the end of the LME's Russian aluminum saga, which has been ongoing since Russia's full-scale invasion of Ukraine in 2022.

The latest sanctions package, which sets a limit between metal produced before and after April 13, will increase pressure on the stock market to call for a ban on Russian aluminum itself.

But there still seems to be a lot of metal moving. Excluding Gwangyang throughput, there have been nearly 106,000 tonnes of net new cancellations since April 12.

Will this non-Russian metal be confiscated? Or has someone thought of another way to take advantage of the new sanctions rules?

There is also a possibility that Russian metal stored outside the market before April 13 will gravitate towards LME storage, which the exchange itself said was a possible outcome.

This has not happened yet, but stocks described by the LME as “out of guarantee” stood at a significant 737,000 tonnes at the end of February, according to the latest monthly stock market update.

Given that Russia's Rusal is such a large producer, with sales of 4.2 million tons in 2023, at least some of these shadow stocks are likely Russian metal.

China's imports of primary aluminum overall and Russia

CHINESE IMPORTS

The LME is fortunate that Russian aluminum still finds a physical home, even though the United States has now banned all imports and many Western consumers are self-sanctioning.

China in particular is sucking up what the West doesn't want to buy.

The country imported 1.2 million tons of Russian primary aluminum last year, up from 462,000 in 2022. In fact, Russian metal accounted for three-quarters of total imports.

The influx continued in the first quarter of this year. Russian imports totaled 392,000 tons, matching the pace of the previous two quarters.

Although China is the world's largest producer of primary aluminum, its vast smelter network is now reaching the government's capacity cap of 45 million tons.

With limited ability to build new smelters other than replacing older capacity, the country appears capable of absorbing a growing amount of imported Russian metal. Rusal's production consists of low-carbon aluminum produced from Siberian hydropower, which likely makes it attractive as a source of raw materials for Chinese product manufacturers.

China's appetite for Russian metal provides an outlet for both new and older production that would otherwise be targeted at LME storage.

However, it remains to be seen whether this will prevent further reallocations of the LME's Russian aluminum package.

Read more: Copper price hits $10,000 again as Goldman sees inventory risk

(The opinions expressed here are those of author Andy Home, a columnist for Reuters.)