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On 6 October 2022, the London Metals Exchange (LME) published a discussion paper seeking views from its members on whether the world’s largest metals marketplace should impose limitations on the amount of Russian metal that it will allow into its warehouses. Although targeted sanctions and related measures have been introduced in specific industry sectors in the aftermath of Russia’s invasion of Ukraine, as of yet there has been no concerted effort by any government to limit the use of Russian metal.
The LME also highlighted in the paper that it has been ‘closely monitoring the usage and throughflow of Russian metal on the LME, to ensure that LME warehouses do not see a significant inflow of unwanted Russian stocks’. The metals marketplace apparently fears a glut of Russian metals collecting dust at its warehouses, as increasing numbers of consumers express their reluctance to accept Russian metals during 2023. According to the LME, such stockpiles would pose the ‘risk of creating a disorderly or unfair market’. Specifically, if consumers choose to ‘self-sanction’ themselves against Russian metals, then there is the risk that such metals will become the cheapest to deliver, which in turn may pull the prices of metals from other jurisdictions down to those of Russia’s. The LME is worried that ‘such developments could threaten the orderly nature of the LME’s markets, and in particular its key role in price discovery for the global physical industry’.
Although metals are usually sold directly to consumers rather than through an exchange, the LME, which is owned by Hong Kong Exchanges & Clearing Ltd, acts as a connector between physical and financial market participants in order ‘to create a global pool of liquidity’:
‘LME contracts can be settled using physical stock stored in LME-approved warehouses. But because most participants use the LME to hedge or gain exposure to the price curve, less than 1% result in actual delivery of metal. The vast majority of LME contracts are “closed out” before settlement.’
The LME therefore acts as a ‘market of last resort’ insofar as it ‘enables producers and consumers to take delivery of metal in times of under-supply and make delivery in times of over-supply’. Given this extra level of security, metal that cannot be traded on the LME usually does so at a discount compared to that which can.
According to the LME’s discussion paper, the percentage of Russian metal compared to that of other jurisdictions has remained ‘both stable and relatively low’ throughout most of 2022. The one exception to this was Russian copper, which went above 80% of the LME’s stock during both May and August. However, the paper also noted that this has not always been the case. Russian copper, aluminium and nickel have reached heights of 95%, 74% and 65% of the LME’s respective stocks over the past ten years. Therefore, the banning of Russian metal from LME’s warehouses could have a significant effect on global markets.
On 29 September 2022, the LME first revealed in a statement that the publication of the discussion paper was on the cards. Since the announcement, the prices of aluminium, nickel and copper have shot up 13.2%, 5.4% and 5.3% respectively as of 7 October 2022.
The share price of Antofagasta plc , one of the world’s largest copper producers, rallied on the 29 September 2022 for the first time in a couple of weeks following news of a possible future LME ban on Russian metals. This continued to rise until 4 October 2022, when the miner disclosed that the overturning of a construction platform working on the marine works of the Los Pelambres desalination plant project earlier in the month had led to lost equipment and the suspension of marine construction work. Since then, the miner’s share price has resumed its steady decline.
Similarly, BHP Group plc, whose mining operations include copper and nickel among other commodities, has also seen a slight uptick in its own share price since the release of the statement.
In reply to the LME’s statement, Russian miner, United Company RUSAL plc (Rusal), the second-largest producer of aluminium in the world, released its own statement refuting media speculation that it was planning to deliver large quantities of its aluminium directly to LME warehouses. In addition, Rusal stated the following with regards to a possible ban of Russian metal by the LME:
‘We would like to point out that there is no basis upon which to take any action regarding warrantability of RUSAL’s metal, and any decision otherwise could have long-lasting negative effects on the market, increase the likelihood of a disproportionate concentration of certain non-Russian origin metal on exchange, leading to increased volatility of both prices and premiums.’
Anglo-Swiss commodity trading and mining company Glencore plc’s share price has also continued to rise following the LME’s statement. However, the company may come to regret its contract with Rusal for 2020–24, under which the former is to receive up to 1.6m tonnes of aluminium per FY from the Russian mining.
LME members have until 28 October 2022 to respond to the discussion paper. The LME will likely disclose its decision regarding Russian metals shortly after this date. Stakeholders will therefore have to wait until then to see the full effect on markets.
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