LME’s Russian aluminium dilemma worsens.
LME's Russian aluminium dilemma worsens.
The Battle for Russian Aluminium: LME under Pressure
LONDON, July 27 (Reuters) – The London Metal Exchange (LME) is facing renewed pressure to exclude Russian aluminium from its warehouse system. Norwegian producer Norsk Hydro has called for the exchange to reconsider its decision last November to continue accepting deliveries of Russian metal. With Russian brands accounting for 80% of warranted aluminium stocks at the end of June, the LME contract is at risk of losing its benchmark status, Hydro warned.
There are no government sanctions on Russian aluminium, and the LME defended its decision by stating that “we note that all metals of Russian origin continue to be consumed by a broad section of the market.” In response, Russian producer Rusal warned that excluding its brands from the LME would be “highly destructive” to the market structure. The company maintained that it “continues to witness a broad acceptance of its low-carbon aluminium to a wide range of global consumers from across the world.”
One major concern for Rusal and the LME is that the biggest consumer of aluminium, China, may be losing its appetite. Despite there being no official sanctions against Rusal, the company’s sales mix has shifted due to punitive import duties in the United States and self-sanctioning by European consumers. Some metal has been delivered to the LME as the market of last resort, but the inflows have been relatively modest.
Despite Rusal’s concerns, the data shows that Rusal and its trading partners have successfully redirected shipments to consumers in Asia, particularly China. In the January-June period, China imported 177% more Russian-branded primary aluminium compared to the same period last year, with Russian brands comprising 85% of China’s total primary metal imports.
However, there are emerging signs that China’s appetite for Russian aluminium, or any primary metal, is waning. In June, China exported more primary aluminium than it did in the previous five months combined, signaling a potential turnaround of metal that had been imported only as far as the country’s bonded warehouses. It should be noted that movement into and out of bonded warehouses shows up as imports and exports, respectively, in China’s trade statistics.
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Additionally, analysts suggest that a significant portion of this year’s “imports” placed in the bonded zone, around 175,000 metric tons, may not be moved into the onshore market. Given China’s recent import mix, there is a high probability that the metal leaving bonded warehouses is Russian brand. The top two destinations for these “exports” were Japan and South Korea, with the majority of Russian-brand deliveries onto LME warrant going to LME warehouses in the port of Gwangyang, South Korea.
China’s rebound in aluminium production, driven by the easing of drought conditions in Yunnan province, has led to a surplus in the market. In contrast, demand for aluminium in China and other industrial metals has failed to meet expectations this year due to contracting manufacturing activity and a stagnant property sector.
As the surplus of aluminium grows, there is a risk that China’s imports of Russian metal will decline, and the units already in bonded zones may be redirected to other markets. However, absorbing these additional units may prove challenging, considering weakening demand for aluminium globally.
These challenges have impacted aluminium prices, with the LME three-month aluminium price hitting a year’s low of $2,127 per metric ton earlier this month. The price remains stuck near the bottom end of its recent range, at $2,210 per metric ton. Time-spreads in the aluminium market are also loose, indicating an oversupply.
In this landscape, the LME faces the challenge of navigating an increasingly polarized aluminium industry. To avoid being caught in the middle, the LME must carefully manage the potential influx of surplus aluminium, hoping that the majority of it is not of Russian origin.
[Disclaimer: The opinions expressed here are those of the author, a columnist for Reuters.]
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