Commodities

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The London Metal Exchange (LME) banned delivery of new Russian metal following sanctions imposed by the US and UK for Russia’s invasion of Ukraine.

No Russian metal produced from April 13 onwards will be eligible for delivery to the LME, or to the Chicago Mercantile Exchange (CME). The move will be bullish for prices on the LME short-term, which are used as a benchmark in contracts around the world. The LME nickel prices, in particular, remain vulnerable to violent price spikes following the nickel squeeze in March 2022 after Russia’s invasion of Ukraine and a build-up in short positions on the exchange. However, the LME has placed daily limits that prevent prices from rising more than 12% a day for copper and aluminium and 15% for nickel.

Russian metals had broadly escaped sanctions until December, when the UK prohibited British individuals and entities from trading physical Russian metals, including aluminum, nickel and copper. The UK is the only country in Europe to have adopted such measures. The LME had previously considered banning Russian metal in 2022 but ultimately decided against it and said it would be guided by government sanctions.

Russia accounts for about 6% of global nickel production, 5% of aluminium and 4% of copper.

European buyers have been self-sanctioning since the invasion of Ukraine, leading to fears that LME warehouses could be used as a dumping ground for unwanted Russian metals. Over the past year, large surpluses of Russian metals have built up in LME warehouses. At the end of March, Russian metal accounted for 36% of the nickel in LME warehouses, 62% of the copper and 91% of the aluminium. These existing inventories would not be affected by sanctions, the LME said.

As consumers in the EU have continued to self-sanction, China’s imports of primary aluminium from Russia hit new highs last year. This trend is likely to continue this year with Russian aluminium continuing to be diverted to Asia, particularly China, the world’s biggest aluminium consumer. China is likely to continue to buy discounted Russian material to use domestically and export its aluminium products into Europe leaving the US to fill the gap left by Russian import ban.

Prices of copper, nickel and aluminium are likely to initially move higher and in the short term, the market will remain volatile, mainly due to the large uncertainty in supply and LME delivery post the sanctions changes. However, the market is likely to adapt to the new dynamics while Russian material will continue to find new sanction-neutral buyers.

In April 2018, the US administration placed sanctions on Russian aluminium producers. LME prices jumped to $2,718/t, at the time the highest since 2011 before gradually falling in the following weeks and months. Sanctions were then lifted in January 2019.

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