The last time the non-ferrous metals market was this tense was during the "LME nickel epic squeeze"...
Last Friday (April 13th), the United States and the United Kingdom announced new trade restrictions on Russian aluminum, copper, and nickel. In response, the London Metal Exchange (LME) announced the suspension of warehouse receipts for Russian metals produced after April 13th.
On Monday, LME non-ferrous metal futures opened sharply higher, but then the gains narrowed. The LME aluminum benchmark contract rose by nearly 6%, the LME nickel benchmark contract rose by 3.6%, and the LME copper benchmark contract rose by 0.49%, reporting $9,453 per ton. The LME zinc and lead benchmark contracts turned to decline.
There is a divergence of views among market participants on the broader impact of the UK and US sanctions on Russian metals: some believe that removing one of the largest metal producers from the market will push up prices; while others are focusing on the prospect of a large influx of old Russian metals (still allowed to trade) into the LME.
The subconscious rise in non-ferrous metals was to be expected.
Russia is an important metal-producing country, accounting for 6% of the global nickel supply, 5% of the aluminum supply, and 4% of the copper supply. Its position in the LME is even more important. Taking nickel as an example, Norilsk Nickel has long been the largest supplier of refined nickel, and refined nickel is the only type of nickel accepted by the LME for delivery.
Advertisement
Therefore, market participants have widely expected that the prices of aluminum, copper, and nickel will rise on Monday, but the predictions for the increase vary, ranging from a few percentage points to 10%. Since the "demon nickel" storm, the LME has implemented daily price increase limits to prevent copper and aluminum prices from rising more than 12% in a day, while the price increase for nickel is limited to 15%.
The escalation of hostile actions in the Middle East may also trigger turmoil. Alastair Munro, a broker at Marex Group, said, "From a price perspective, it naturally tends to be higher. However, on the contrary, it is also necessary to see if there are funds or traders who have to reduce their positions due to increased volatility, which would be an interesting thing."
Many metal traders and brokers worked throughout the weekend, speculating on the impact of the new sanctions on the market. The timing of the release of the relevant news coincided with the official opening of the top industry event "Cesco Copper Week" in Santiago, the capital of Chile.
The actual impact may be limited?Traders are no strangers to the risks of sharp fluctuations in the metal market and the tension of weekends, especially after the epic nickel squeeze in March 2022 that nearly destroyed the London Metal Exchange (LME)'s reputation, and the sanctions imposed on United Company Rusal International PJSC in 2018.
However, traders and executives have said that new restrictions are unlikely to have as significant an impact as the two aforementioned events.
The entanglement between Russia's two major metal giants—United Company Rusal (Rusal) and MMC Norilsk Nickel PJSC—and the Western financial system has eased compared to before the Russia-Ukraine conflict, and the industry has been preparing for potential sanctions over the past two years.
By targeting Russian metal supplies produced after April 13, sanctions have divided the metal market's supply into three categories: new Russian metals, currently prohibited from being delivered to the LME; old Russian metals produced before April 13; and non-Russian metals.
The LME confirmed last Saturday that old Russian metals can continue to be delivered, but the exchange added that evidence is required to prove that these metals have not violated sanctions regulations, and deliveries will be approved on a case-by-case basis.
The LME's approach is essentially implementing the restrictions imposed by the United States and the United Kingdom last Friday. However, this could reignite a debate on whether Russian metals should be completely banned to protect the exchange's position as a global benchmark. If Russian supplies continue to be allowed, the metal prices set by the LME are likely to increasingly equate to the prices of old Russian metals.
As of the end of March, Russian metals accounted for 91% of the LME's aluminum inventory, 62% of copper inventory, and 36% of nickel inventory. Traders now expect a batch of old Russian metals that were previously stored outside the LME to flow into the LME, as their owners worry about potential new trading restrictions in the future.
In terms of the aluminum market, the amount of Russian aluminum held outside the LME ranges from hundreds of thousands to millions of tons.
In its notice last Saturday, the LME acknowledged that the uncertainty caused by sanctions means that a "relatively large amount" of old Russian metal supplies may flood the exchange.
The influx of old Russian metal supplies may depress spot prices, causing them to fall relative to forward contract prices. This situation is known as contango and usually indicates a well-supplied market.The futures prices of copper, aluminum, and nickel have already reached historical highs, partly due to the increasing share of Russian metals on the exchange, with only a few consumers, traders, and brokers willing to engage.
As for the LME, it considered banning the import of Russian metals in 2022 but ultimately decided not to, on the grounds that Russian metals are still circulating in the physical market and the exchange should not take action beyond the requirements of sanctions.
Last Saturday, the exchange stated that it would continue to assess its Russian metal positions, but emphasized that traders continued to receive Russian aluminum from LME warehouses in January, February, and March.
The new regulations announced by the UK and the US last Friday also include a clause that will make it easier for traders to receive old Russian metals. Although the metal sanctions announced by the UK in December last year initially banned Britons from demanding delivery of Russian metals from the LME, the British government has now lifted this restriction, as long as the metals have entered the exchange's system before April 13th.
Traders say they expect copper, aluminum, and nickel to react very differently. Colin Hamilton, Managing Director of Commodity Research at BMO Capital Markets, said that the reaction of nickel prices may be the most extreme.
He said, "The initial reaction will definitely be to a certain extent of panic, and nickel may be the most intense, however, the market tends to adapt to such shocks quickly."
Leave A Reply