Russian metal faces sanctions, while the United States blocks deliveries to LME

Russian metal faces sanctions, while the United States blocks deliveries to LME

The United States and the United Kingdom imposed new restrictions on trade in Russian aluminum, copper and nickel that will impact on global metals markets, in the latest attempt to curb President Vladimir Putin's ability to finance his war machine.

The rules prohibit the delivery of new supplies from Russia to the London Metal Exchange – where global reference prices are set – as well as the Chicago Mercantile Exchange. The restrictions apply to copper, nickel and aluminum produced on or after April 13, and the United States also bans Russian imports of the 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 physically purchasing Russian copper, nickel or aluminum. YesWhile the LME plays a key 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 metal 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 large number of contracts around the world. For months, an influx of Russian metals has weighed on LME prices – particularly aluminum – and non-Russian supplies are trading at a premium.

Sanctions will also affect traders' willingness to handle Russian metal, as many see the ability to comply with the LME as essential.and some contracts include clauses specifying that they will be void if the metal is no longer deliverable to the LME.

That means the metal is likely to be traded at an increasingly discount to other sources – thus reducing the revenue Russia receives – while continuing to flow into the global market and avoiding the impact of large-scale sanctions on raw materials. crucial premiums. Russian metal exports reached a value of $25 billion in 2022 and $15 billion in 2023.

“We will reduce Russia's gains while protecting our partners and allies from unwanted spillovers,” U.S. Treasury Secretary Janet Yellen said in a joint statement with her British counterpart, Jeremy Hunt, adding that the move “will prevent the Kremlin from funneling more money into its war machine.”

The LME said in a notice that it will provide guidance on the impact of the new restrictions by 11am 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, who have so far avoided Western sanctions since the war began.

It will also raise questions for Glencore Plc, which remains one of the largest Russian metal traders 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 and gold and numerous officials and companies, Russia's largest metals industrial groups Until now they have been able to continue selling their products without general restrictions.

However, many buyers have tried to avoid Russian supplies, and Western producers, including aluminum maker Alcoa Corp., have actively campaigned for restrictions on their 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 receive the metal. While the UK imposed some restrictions on trading in Russian metals by British entities in December, it included an exemption allowing trading to continue on the LME.

Russia is a major producer of all three metals, accounting for around 6% of global nickel production, 5% of aluminum and 4% of copper. However, Russian supplies account for a much larger percentage of the metal on the LME. At the end of March, the Russian metal represented 36% of the nickel in LME warehouses, 62% of copper and 91% of 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 designed to prevent the type of market disruptions that resulted from the sanction of Oleg Deripaska in 2018, which caused aluminum prices to spike and caused widespread concern among consumers of the metal, according to a senior Treasury official. The metals supply chain has changed significantly since then, resulting in a more diverse set of suppliers, said the official, who requested anonymity to discuss internal deliberations.

Palladium and titanium, two metals of which Russia is a particularly important supplier, are not included in the restrictions.