The challenging world of Russian aluminium sanctions | Hotter Commodities

The London Metal Exchange is finding that when it comes to metal of Russian origin, and in particular aluminium, it can't please all of the people all of the time

On the one hand, it has faced pressure from some producers who argue that the dominance of Russian aluminium stored in LME warehouses, and the reluctance of many Western market participants to trade or consume it, means the exchange price has diverged enough from the physical market to make it irrelevant.

The LME should sanction Russian metal, they argue, and restore credibility to the price, along with convergence to the underlying physical market.

On the other hand, some Europe-based consumers and traders argue that, in a region depleted of production capacity and facing ongoing supply chain disruptions due to the Panama Canal and now Red Sea shipping crises, Russian aluminium supplies are critical.

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According to Jorge Gomez, managing director at Spain-headquartered aluminium extruder Extrusax, the regional processing industry in Europe still relies either directly or indirectly on imports of primary aluminium, alloys or alloying components from Russia.

“The interconnectedness of global supply chains becomes quite clear when considering the two main channels of metal imports into the European Union – one being via Baltic/Black seas from Russia and the other from the Middle East, India and Asia via the Suez Canal,” he told Fastmarkets.

“We also need to understand that ambitious goals of decarbonization as those expressed in recent EU commitments will become more and more difficult to meet. There is only so much that the market is prepared to pay for,” he said, adding: “How will this work if low-carbon aluminium becomes even more scarce and expensive thanks to obstacles like a Russian aluminium ban?”

That’s an opinion that Rusal, which annually produces and supplies more than 4.3 million tonnes of primary aluminium metal and alloys worldwide, agrees with.

There are, of course, merits on both sides of the argument, and it is clear that whatever it does, the LME will not satisfy everyone. With around 90% of aluminium stored in LME warehouses being of Russian origin, the pressure on the exchange is not likely to vanish overnight.

Where things stand

The LME has not exactly been inactive to date.

It decided against sanctioning Russian metal after a discussion paper published in November 2022.

But in April 2022, the LME suspended the placement of Russian aluminium, among other metals, in LME warehouses in the UK.

That was followed in February 2023 by the exchange suspending the storage of primary aluminium, copper, lead, nickel or aluminium alloy from Russia in LME warehouses in the US.

The LME also issued new guidance on the warranting and trading of Russian metal by UK-based persons on the exchange in December.

All of these measures were taken following sanctions decisions made by the government of the UK, under whose regulatory guise the LME falls, and a move on tariffs by the US, whose currency the exchange’s contracts are priced in.

The US is not sanctioning Russia-origin aluminium, although it has in the past.

In April 2018, it sanctioned and froze assets of Russian oligarch Oleg Deripaska, who was then the majority owner of En+ Group and key aluminium producer Rusal. But it did issue licenses allowing Rusal to continue to do business with existing supply deals.

In line with those sanctions, the LME restricted the warranting of Rusal material produced after April 6 of that year.

The sanctions against Rusal and En+ Group, and the LME’s temporary suspension of Rusal’s aluminium, were removed in January 2019.

More recently, the EU has imposed sanctions on aluminium products including wire, foil, tube and pipe, which account for 12-15% of imports into the region. But the majority of Russian aluminium exports to the EU, including primary metal, are outside the scope of the measures.

Some member states are lobbying for the EU to widen the scope of the sanctions; others are against such action. It would require all 27 member states to agree to pass new measures.

Given that politics is often a series of tradeoffs based on which core values are most core to most people or politicians at that given time, anything is possible.

Imports

Although the EU continues to import Russian aluminium, volumes have declined significantly in the past couple of years, since many aluminium market participants in the EU have already been self-sanctioning and shunning Russian metal, Fastmarkets understands.

The EU imports around 4.5 million tonnes of aluminium annually. Trade data shows that EU imports of aluminium from Russia accounted for around 10% of its ingot imports last year, a roughly 40% decline and way below the more than 1 million tonnes imported before the war in Ukraine.

The gap has been mostly filled by imports from the Middle East, India and Southeast Asia, but this material is now being affected by the various logistics issues impacting the freight market.

European aluminium premiums have already started to move higher this year amid the dislocations in the supply chain.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $240-250 per tonne on Tuesday January 23, up from $230-245 per tonne a week earlier and from $190-215 per tonne at the beginning of the year.

It is important to remember that the biggest buyer of Russia-origin metal is China. Last year, around three-quarters of China’s aluminium imports came from Russia, a level that is not expected to drop in 2024 and, if anything, will rise, analysts forecast.

In fact, Goldman Sachs analyst Nicholas Snowdon said that, given that China’s aluminium supply will likely remain restrained by its 45 million tonnes per year capacity cap and demand supported by continued growth in green channels, import requirements are likely to grow into mid-decade.

“Given annual Russian aluminium exports are just over 3 million tpy, it is likely that China will absorb nearly 70% of that volume in 2024, which compares to zero pre-2022,” he noted. “If that China import pull on Russian units continues to grow, then the volume of dislocated units at risk of being delivered into the LME will continue to fall.”.

What’s next?

The LME is highly unlikely to act unilaterally and impose any new restrictions on Russian aluminium without further action by any of the governments of the UK, US or the EU.

The exchange’s key job right now is ensuring the deliverability of the metal in its system, and that includes the Russian aluminium populating its warehousing network.

Like the US in 2018, the UK has recognized that trade licenses allow the global trade of aluminium to continue without further disruption. All eyes will be on the EU to see what, if anything, it is able to negotiate and how far-reaching sanctions might be.

It’s important to remember that the UK is no longer part of the EU and therefore not under the jurisdiction of its laws. So even if the EU were to impose sanctions on historical Russian metal and refuse to issue trade licenses, the ban would not be binding on the LME.

That scenario is not necessarily on the table, but it would pose something of a dilemma for the LME; it would add to the commercial – and perhaps moral – pressure to act, but would not be a legal requirement.

With the second anniversary of Russia’s invasion of Ukraine just one month away, momentum is building to add to the package of measures already taken against Russia. All eyes are on the governments of the major Western powers to see what, if anything, they decide to do.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.

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