via metal minor
Anyone involved in the metals market now knows that the US and UK recently banned Consumption of Russian aluminum, copper and nickel produced after April 13th. Metals already listed on the London Metal Exchange (LME) and Chicago Mercantile Exchange (CME) will remain consumable, but metals delivered after this date will not be accepted. This is true whether the buyer purchases the metal directly or has it physically delivered to an exchange to settle the contract.
Metals Market Continues to React to Russia’s Ban
Russia produces about 6% of the world’s nickel, 5% of aluminum and 4% of copper. That being said, the biggest impact is probably on nickel. This is because Russia is the second largest producer of refined Class 1 nickel in the world after China, and Class 1 nickel is currently the only type available for shipment on the LME. Russian aluminum also dominates her LME’s warehouse system, accounting for about 90% of the available metal. Indeed, many in the metals industry believe Russia’s position is a fundamental weakness that the LME has not been able to correct.
Consumers, on the other hand, seem to be more concerned about what’s next for the metals market. Will banning Russian metals, which account for about half of LME’s average inventory, but little of CME’s inventory, mean the two markets will split? Will arbitrage be opened at a premium to CME and a discount to LME, reflecting the inaccessible nature of a significant portion of LME inventory?
So far, there is no evidence of that. However, it has only been a week since the new system was put in place. Over the past six months, there has been a mass exclusion of non-Russian aluminum brands from the LME.
Traders shift focus to Russian warrants amid fallout ban
For some time, Indian metals accounted for about 50% of inventory levels, but were eagerly sought out and removed by traders. After the Russian ban, those same traders switched to a completely different game: buying up Russian warrants, removing them from the market, and then delivering them.
This makes the metal ineligible for Western consumers, and the buyer receives a rebate on warehouse usage fees with the expectation that the metal will be stored there indefinitely. That means the metal will remain there until someone finds a way to economically supply it to markets that aren’t part of the ban, such as China or India.
China remains a large consumer of Russian metals
Other metal market players continue to Infer Also about other issues. Specifically, we ask whether the dominance of Russian metals in Europe and Asia lowers physical delivery premiums in those regions or lifts delivery premiums in the U.S. Midwest, reflecting the greater desirability of CME inventories. I think I want to know.
There is already a clear divergence in premiums, with Europe at twice the price of Japan at major Asian ports, and the US at about three times the price. This reflects the overall closeness of the areas to each other.
Japan does not import Russian aluminum, but consumption by neighboring countries still drives down regional prices. For example, just as the region buys Russian oil at a steep discount to world oil prices, China will almost certainly buy the large amount of Russian aluminum it consumes at a steep discount to the LME. Purchased at a discount.
For the time being, Russian metals are likely to receive discounts from LME/CME prices in spot trading. Aside from the no-guarantee/reassurance game underway this month, only countries that do not recognize the US/UK ban will accept Russian metal. And, let’s be honest, that’s true for most parts of the world right now.
Written by Stuart Burns
