How a ban on Russia’s mining giants could shake the metals world

26 October, 2022

The London Metal Exchange may be applying a possible ban on Russian Supplies. If the ban were to go ahead, some of the world’s biggest companies will be cut from the main global marketplace.

The decision is currently undergoing a three-week discussion process with the possibility of moving forward as soon as November 2022.

If the ban of Russian Supplies were to take place, it would mean metal from Russia could no longer be delivered to any warehouses around the world in the LME network.

Russia currently account for 9% of global nickel production, 5% of aluminium and 4% of copper.

Despite being a private company owned by Hong Kong Exchanges & Clearing, the exchange’s decisions have far-reaching consequences for the way in which metal is priced and traded globally.

It should be noted that most of the global metal is sold from producers to traders and consumers. It doesn’t always go through the LME network. Some of the biggest producers have noted that they almost never sell their metal to LME. Top Russian groups include United Co. Rusal International and MMC Norilsk Nickel.

Here is how the proposed ban could affect the market

LME is often a market of last resort for the physical metals industry. In the instance of a metal shortage, stocks within the global network of LME may be drawn down. If there is excess inventories, they may be delivered to the LME.

It has been forecasted that they will be expecting an increase of excess resources, particularly aluminium. Should the LME go ahead and ban new deliveries of Russian aluminium, that would remove the potential overhang of stock.

Last week, Bloomberg first reported the LME’s plans causing aluminium prices to jump as much as 8.5% — the biggest intraday rise on record — as traders who had been anticipating an inflow of Russian metal rushed to reverse their short bets. Prices are currently up by 10%.

In the case the LME doesn’t take action against Russia and enforce the ban, they may face a flood on the exchange from Russian metal that many consumers refuse to touch. This may cause its prices to stop being useful as global benchmarks.

A quick rollout of the ban may be necessary to help prevent a rush by holders of Russian metal to deliver it on the exchange before the restrictions came into place.

A potential ban may affect LME Deliverable Contracts

It should be noted that some contracts between producers, traders and consumers stipulate that the metal should be “LME deliverable.” A ban may mean some of these contracts need to be broken.

The benefit of a metal being branded “LME deliverable” is that in the event of any problems, it could be sold easily on the exchange.

The discussion alone of the ban could reduce sales to Europe from companies such as Rusal and Nornickel due to the uncertainty in the market. This may mean Russian companies are forced to accept lower prices.

Nornickel already was weighing options to redirect some sales to the east if sanctions against Russia didn’t allow it to maintain its current sales structure, CEO VladimirPotanin said in an interview with RBC TV in September.

“At the end of the day, this won’t change supply-demand balances, but it does mean we’ll have metal looking for a home,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets. “Someone somewhere will buy that metal at a discount.” 

This article is sourced from Mining Weekly.

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