This was the latest move by the authorities, which have been weighing their next steps intended to limit Russia’s revenue from the sales of key commodities such as metals and oil. This was a continuation of the sanctions imposed after Russia’s invasion of Ukraine.
While the decision has raised concerns about a flood of metal onto warrant, it was probably a better option than banning Russian metal from the exchanges regardless of when it was produced. A more extreme move would have significantly increased the probability of delivery failures and market instability.
That was because of the increased chance that short-position holders would have found themselves scrambling to find units eligible for delivery. It could also have resulted in some market participants using the ban as an excuse for not fulfilling delivery obligations.
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Instead, the new rules divide Russian metal into two categories – anything produced and warranted before April 13 is now Type 1, and anything produced before April 13 and warranted on or after that date is Type 2.
But basing the sanctions on production rather than bringing in a wholesale ban does raise the risk that more metal goes on warrant. This inevitably would increase the amount of metal that would be less useable for people in the UK, a topic that has been hotly debated in the recent past.
It is important to remember that nobody actually knows how much Russian metal is off-warrant and could begin to move to an exchange.
There are more than 1.2 million tonnes of metal in LME warehouses at the moment, of which 927,477 tonnes is open-tonnage and the remainder is cancelled.
According to the latest data released by the exchange, 39.6% of the total open-tonnage stocks in LME warehouses on March 28 were of Russan origin.
So what will happen now to companies with contracts to take Russian metal?
It is likely that these contracts have a clause which states that the metal must be warrantable on a specific exchange, such as the LME. Buyers could now work to renegotiate the clause to take the metal at a discount. They could also opt to warrant Type 1 metal and use Type 2 metal for physical delivery.
Similarly, Russian companies may push to sell type 1 metal in the physical market and avoid accepting a discount. The option to sell to physical market customers in China, India and the EU remains wide open, because similar sanctions do not exist in those jurisdictions.
The LME has added a series of fairly onerous steps to the procedure for putting metal on-warrant. The extra level of bureaucracy could act as a deterrent, and mean that market participants will opt to trade physical material instead of warranting metal after all.
This report was had been updated to correct the first paragraph, which said that Russian brands produced before Saturday April 13 could not be delivered to the LME.
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