Studied London Metal Exchange LME A ban on Russian supplies would be an earthquake for the metals industry and cut off some of the world’s largest companies from the main global market.
The exchange has not made a decision yet, but on Thursday it launched a 3-week official dialogue about the possibility of banning Russian minerals, most likely as soon as next month, according to “Bloomberg” and seen by “Al Arabiya.net”.
In practical terms, the ban could simply mean that minerals extracted from Russia – which accounts for about 9% of global nickel production, 5% of aluminum and 4% of copper – can no longer be delivered to any warehouses around the world in the LME network, which stores the metals. Used to deliver against futures contracts upon expiration.
But the controversy, and the potential ramifications, provide a stark case study of how LME is intertwined with all corners of the physical metals industry. Despite being a private company owned by Hong Kong Exchanges & Clearing Ltd, the exchange’s decisions have far-reaching consequences for the way the metal is priced and traded globally.
To be clear, the vast majority of the world’s metals are sold from producers to traders and consumers without seeing what’s inside the LME depot. Big producers, including the largest Russian groups, Rusal International and MMC Norilsk Nickel, never sell their metals directly on the London Metal Exchange. But stock exchanges nevertheless play several vital roles.
First, it is a market of last resort for the physical metals industry: metal stocks can be withdrawn into the global network of LME depots in moments of shortage, and in times of glut, excess stocks can be delivered to the London Metal Exchange.
In recent months, traders have been bracing for a glut, especially in aluminum, amid concerns about the state of the global economy. With some buyers shunning the Russian metal, traders expected aluminum from Rusal to be among the first to be delivered to the London Metal Exchange – some expecting inflows in the hundreds of thousands of tons. For its part, Rusal denied that it plans to deliver “large quantities” of its metal to the stock exchange.
Should the London Stock Exchange continue to ban new deliveries of Russian aluminum, this would remove a potential overstock, which could send the aluminum price higher. On Friday, prices rose nearly 10% from their lowest level last week, which was the lowest in 19 months.
London Stock Exchange delivery
Any move by the London Metal Exchange would also have repercussions beyond warehouse flows. For example, some contracts between producers, traders and consumers stipulate that the metal must be “deliverable” to LME warehouses, which means that a ban imposed by the LME may lead to contracts being broken.
Banks often insist that the metal they fund must be deliverable on the London Metal Exchange, because they want to make sure that in case of any problems it can be easily sold on the exchange. Many traders rely on the fact that the metal can be delivered to the London Metal Exchange when they use Metal Exchange contracts to hedge their physical stocks.
As a result, any move by LME could cause headaches for Rusal and Nornickel, as well as their biggest clients. Glencore Plc in particular has an extensive multi-year contract to purchase commodity grade aluminum from Rusal.
There is already an expectation in companies that the consultation process launched by the London Metal Exchange will make it more difficult for Rusal and Nornickel clients to finance working capital using the metal as collateral, Bloomberg quoted sources as saying.
The very idea of having a conversation about banning Russian companies is likely to cause Nornickel’s sales to Europe to plummet, as it creates uncertainty at a crucial time of the year for contracts.
This means that the ban on the London Metal Exchange could force Russian companies to accept lower prices.
CEO Vladimir Potanin said in an interview with RBC TV in September that Nornickel was already considering options to redirect some sales to the east if sanctions against Russia did not allow it to maintain its current sales structure.