Russian Metal Hit With Sanctions As U.S. Blocks Deliveries To LME
The metals world has been increasingly divided over how to handle Russian supplies since the invasion of Ukraine.
(Bloomberg)
The US and UK imposed new restrictions on trading Russian aluminum, copper and nickel that will reverberate across global metal markets, in the latest bid to curb President Vladimir Putin’s ability to fund his war machine.
The rules prohibit delivery of new supplies from Russia to the London Metal Exchange — where the global benchmark prices are set — as well as to the Chicago Mercantile Exchange. The restrictions apply to copper, nickel and aluminum produced on or after April 13, and the US is also banning Russian imports of all three metals.
The decision is unlikely to prevent Russia from being able to sell its metals, since the sanctions do not prevent non-US persons and entities from buying physical Russian copper, nickel or aluminum. While the LME plays a pivotal role in setting global prices, the vast majority of metals are bought and sold between miners, traders and manufacturers without ever seeing the inside of an LME warehouse. Already since 2022, the share of Russian metals sales to China has increased substantially, as some western buyers sought alternative suppliers.
But the new restrictions are likely to affect prices on the LME, which are used as a benchmark in a huge number of contracts around the world. For months, an influx of Russian metal has weighed on LME prices — particularly for aluminum — with non-Russian supplies trading at a premium.
The sanctions will also affect the willingness of traders to handle Russian metal, as many view the ability to deliver on the LME as essential, and some contracts include clauses specifying that they will be void if the metal ceases to be LME-deliverable.
That means the metal is likely to trade at a widening discount to other origins — thus reducing the revenue Russia receives — while still continuing to flow into the global market and avoiding the impact of full-scale sanctions on crucial raw materials. Russian metals exports were worth $25 billion in 2022 and $15 billion in 2023.
“We will reduce Russia’s earnings while protecting our partners and allies from unwanted spillover effects,” US Treasury Secretary Janet Yellen said in a joint statement with her UK counterpart, Jeremy Hunt, who added that the move “will prevent the Kremlin funneling more cash into its war machine.”
The LME said in a notice that it will provide guidance on the impact of the new restrictions by 11 a.m. on Sunday. The CME is also reviewing the announcements and will communicate any impact on its markets, a spokeswoman said.
The move will be a blow to major miners MMC Norilsk Nickel PJSC and United Co Rusal International PJSC, which have so far avoided western sanctions since the war started.
It will also raise questions for Glencore Plc, which has remained one of the biggest traders of Russian metal thanks to a long-term contract with Rusal.
The metals world has been increasingly divided over how to handle Russian supplies since the invasion of Ukraine. While western sanctions have targeted Russian oil, gold and numerous officials and companies, Russia’s largest industrial metals groups have until now been able to continue to sell their products unhindered by any blanket restrictions.
However, many buyers have sought to avoid Russian supplies, and western producers including aluminum maker Alcoa Corp. have actively campaigned for restrictions on its production.
The LME itself considered banning deliveries of Russian supplies in 2022 but ultimately decided against it, arguing that there were still enough buyers willing to take delivery of the metal. While the UK imposed some restrictions on trading in Russian metals by UK entities in December, it included an exemption allowing trade on the LME to continue.
Russia is a major producer of the three metals, accounting for about 6% of global nickel production, 5% of aluminum and 4% of copper. However, Russian supplies account for a much larger percentage of metal on the LME. At the end of March, Russian metal accounted for 36% of the nickel in LME warehouses, 62% of the copper and 91% of the aluminum.
Comex copper futures rose after the announcement, while shares of US metal producers including Alcoa Corp. gained in post-market trading.
The restrictions were crafted to avoid the kind of market disruptions that resulted from the sanctioning of Oleg Deripaska in 2018, which caused aluminum prices to spike and triggered widespread concern among consumers of the metal, according to a senior Treasury official. The supply chain of metals has changed significantly since that time, resulting in a more diverse set of suppliers, the official said, requesting anonymity to discuss internal deliberations.
Palladium and titanium, two metals where Russia is a particularly significant supplier, are not included in the restrictions.
--With assistance from Joe Deaux.
(Updates with details throughout.)
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