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Analysis of the impact of LME and US sanctions on Russian aluminum

Analysis of the impact of LME and US sanctions on Russian aluminum

Event Review

As the situation between Russia and Ukraine continues to evolve, Bloomberg reported at the end of September, citing people familiar with the matter, the London Metal Exchange (LME) is launching a discussion paper to discuss whether and under what circumstances the new supply of Russian metal is banned, triggering market concerns about the supply of LME aluminum, and the short-term volatility of LME aluminum prices increased.

Following the news issued to mid-October, the U.S. White House also issued a statement that it will consider the implementation of retaliatory ban on Russian aluminum, again triggering the market for Europe and the United States aluminum supply tension concerns. However, the sanctions were not immediately implemented, are put forward after the statement for the time being no new progress, and the market has been rumored that some traders in advance of the delivery of the news, LME inventory has also continued to appear a significant increase. At present, the market is still worried about the LME restrictions on Russian metal trading, waiting for the specific landing on October 28th.

I. LME and US sanctions documents and news interpretation comb

1、LME discusses banning new supplies of Russian metals

Bloomberg reported on September 29, citing people familiar with the matter, the London Metal Exchange (LME) is launching a discussion paper to discuss whether and under what circumstances to ban new supplies of Russian metals. The LME has previously stated that it does not intend to take any action against large Russian metal producers such as Rusal outside the scope of sanctions, but this release begins consultations on a ban on trading Russian metals. While this consultation does not mean that the LME has made a decision to take action, it marks a shift in approach and the possibility of new initiatives in banning Russian metal supplies in the future may have a significant impact on the global metals market.

According to Golden Ten Data, on October 7 the London Metal Exchange officially published the “LME Discussion Paper on Russian Metals”, stating that the discussion was taken for whether the LME would ban the flow of Russian metals into LME warehouses in 2023. The document analyzes in detail the delivery data of Russian metals, including aluminum, in the exchange warehouses in recent years. From the relevant charts and historical data provided by the LME, the proportion of Russian aluminum in the LME warehouses this year is not high, remaining at around 10%-20%, and the overall proportion is relatively stable. Currently global metal market participants are executing supply and sales contracts for 2022 and are willing to accept deliveries of Russian metal. And in the preliminary discussions about the 2023 contract signing, some market participants expressed their reluctance to purchase Russian metal again, which may lead to a large amount of Russian aluminum supply entering LME warehouses thus leading to LME market price deviation.

In response to the current decline in acceptance of Russian metal by market participants in the future, and the potential risks that may follow, the LME lists three different courses of action: first, to maintain the current program and continue to accept Russian metal; second, to set a threshold for the amount of Russian metal in LME warehouses; and third, to suspend the guarantee of Russian metal in LME warehouses worldwide altogether. While the document presents the first two options, it shows a stronger preference for the third option, giving specific implementation methods. the LME indicates that it has invited traders to provide feedback by October 28, and will also continue to consult with its members and make a final decision.

2, White House Considers Retaliatory Ban on Russian Aluminum

According to Golden 10 data news, on October 13 the U.S. government said it was considering a total ban on imports of Russian aluminum in response to Russia’s escalating military action in Ukraine. As Russian aluminum is needed in various fields from cars and skyscrapers to iphones, this resource has long been free from sanctions. According to people familiar with the matter, the White House is considering three options: a complete ban on imports, the second is to raise tariffs to punitive levels, and the third is to sanction the United Co. Rusal International PJSC, which produces aluminum. The potential ban is said to be in response to Russia’s missile attacks on Kiev and other Ukrainian cities this week, which damaged critical infrastructure and civilian facilities.

3, Canco reportedly delivered large quantities of Russian aluminum to LME Korea warehouse

According to market news, two sources with direct knowledge of the matter said on Oct. 19 that commodities trader Glencore had delivered a large quantity of Russian-origin aluminum to the London Metal Exchange’s (LME) registered warehouse in Gwangyang, South Korea. Another source with direct knowledge of the matter said the aluminum delivered to the Gwangyang warehouse was produced by Rusal. Rusal agreed in April 2020 to a long-term contract to supply 6.9 million tons of aluminum to London-listed Gartner, with 344,800 tons scheduled for delivery in 2020 and about 1.6 million tons per year between 2021 and 2024. The current significant deliveries to LME warehouses show that market participants are significantly less receptive to the Russian metal.

Second, the Russian aluminum production and import and export trade situation

Russia is a major producer of aluminum, nickel and copper, of which Russia is the world’s second largest producer of primary aluminum, according to SMM statistics Russia Aluminum United annual production capacity of about 4.5 million tons, accounting for about 6% of the total global electrolytic aluminum capacity, accounting for 13% of the global electrolytic aluminum capacity in addition to China. 2021 Russian electrolytic aluminum production of 3.76 million tons, accounting for about 5.6% of global production. 2021 Russian aluminum The export volume is 3.48 million tons, accounting for about 12% of the global export volume, which is mainly exported to Europe, Asia and North America and other countries. In 2021, the total export of Russian primary aluminum to Europe is about 1.611 million tons, accounting for 41% of its total exports; the total export to North American countries is 242,000 tons, accounting for about 8.3%. Russian aluminum production and exports have an important share, so the market is concerned about the overseas aluminum supply after the LME banned the trading and delivery of Russian aluminum metal. From the U.S. trade situation, the U.S. imports of Russian aluminum monthly average of 20-25,000 tons, accounting for about 10% of its total imports, the volume is not particularly large, but if the U.S. sanctions on Russian aluminum, may also cause aluminum supply tightening in Europe and the United States.

Third, the LME and the United States of America on Russia sanctions on the impact of aluminum prices analysis

Nearly two weeks LME and the United States to Russia aluminum sanctions news continued to ferment, has not yet landed, for the market and the price of short-term see the overall impact is divided into 3 stages: the first stage is the emergence of news at the beginning, the market is worried about LME and the United States supply reduction, so the short-term stimulation of aluminum prices pushed up. The second stage is with the limited time October 28th approaching, Russian aluminum’s holder is worried about Russian aluminum is sanctioned, transfer to LME warehouse in advance, the continuous plate delivery position makes LME inventory continues to increase, suppressing LUN aluminum price. We can see in just one week’s time, lme inventory increased significantly by 202,800 tons to 570,000 tons, an increase of 55.23%, so the short-term LUN aluminum performance is weaker. The third stage is again back to the logic after being sanctioned, the market in the rumor of canco plan delivery of Russian aluminum to the LME warehouse, which also raised the possibility of the LME ban on Russian aluminum trading, short-term market again worried about the reduction of lun aluminum supply, lun aluminum followed again a short rally.

From a long-term point of view, the LME ban on Russian aluminum metal as expected, the probability will affect the circulation and trading of Russian aluminum in overseas markets, Russian aluminum enterprises may look for other markets and trading methods, do not rule out the possibility of accepting lower prices, while there is also the possibility of reducing production. If there is no extreme sanctions, Russian aluminum does not reduce production, more influence may be the trade structure change, Russian aluminum will be part of the inflow into the domestic, converted into aluminum exports, domestic supply pressure increased, overseas inventory pressure reduced, from this point of view is conducive to internal and external positive set logic, but the inflow into the domestic amount to consider the level of import profits.

In addition, from the history of similar events, the United States had implemented sanctions against Rusal in April 2018, and the sanctions lasted until late January 2019 before being lifted. During this period, the LME March aluminum price rose by as much as 37.5% in two weeks’ time from April 6, 2018 onwards. Russian aluminum was sanctioned leading to a significant increase in China’s aluminum exports, according to data from the General Administration of Customs, China’s exports of unforged aluminum and related aluminum products in July 2018 increased to a three-year high of 520,000 tons, and exports in subsequent months were also higher overall than in the same period of the calendar year. Therefore, this year, if the United States again banned the import of Russian aluminum, or will partially reproduce the 2018 aluminum export increase, but the increase needs to be integrated to see the current macroeconomic environment.


Post time: Oct-27-2022