How a ban on Russia’s mining giants could shake metals world

Traders and brokers on the floor of the open outcry pit at the London Metal Exchange. A possible ban on Russian supplies by the LME would be a seismic event for the metals industry, cutting some of the world’s biggest companies off from the main global marketplace.

A possible ban on Russian supplies by the London Metal Exchange would be a seismic event for the metals industry, cutting some of the world’s biggest companies off from the main global marketplace. The exchange has yet to make a decision, but on Thursday launched a formal three-week discussion process on the possibility of banning Russian metal, potentially as soon as next month. In practice, a ban would simply mean that metal from Russia — which accounts for about 9% of global nickel production, 5% of aluminium and 4% of copper — could no longer be delivered into any warehouses around the world in the LME network, which store metal used to deliver against futures contracts when they expire. But the debate, and potential fallout, provide a stark case study of how deeply the LME is intertwined with all corners of the physical metals industry. Despite being a private company owned by Hong Kong Exchanges & Clearing Ltd, the exchange’s decisions have far-reaching consequences for the way in which metal is priced and traded globally. To be clear, the vast majority of global metal is sold from producers to traders and consumers without ever seeing the inside of an LME warehouse. And big producers, including top Russian groups United Co Rusal International PJSC and MMC Norilsk Nickel PJSC, almost never sell their metal directly on the LME. But the exchange nonetheless plays several vital roles. First, it’s a market of last resort for the physical metals industry: stocks of metal in the global network of LME warehouses can be drawn down in moments of shortage, and in times of glut excess inventories can be delivered to the LME. In recent months, traders have been bracing for a glut, particularly in aluminium, amid concerns about the state of the global economy. As some buyers shun Russian metal, traders had expected that aluminium from Rusal would be among the first to be delivered to the LME — with some expecting hundreds of thousands of tonnes of inflows. Rusal has denied it is planning to deliver “large quantities” of its metal to the exchange. Should the LME go ahead and ban new deliveries of Russian aluminium, that would remove the potential overhang of stock. When Bloomberg first reported on the LME’s plans for a discussion paper last week, aluminium prices jumped as much as 8.5% — the biggest intraday rise on record — as traders who had been anticipating an inflow of Russian metal rushed to reverse their short bets. As of Friday, prices were up about 10% from last week’s 19-month low. Of course, the LME is considering this drastic step because it’s worried about a similarly disruptive possibility if it doesn’t take action: that Russian metal that many consumers refuse to touch will flood onto the exchange and cause its prices to stop being useful as global benchmarks. In fact, one of the reasons it is considering a quick rollout of any possible ban is that a decision to proceed could prompt a rush by holders of Russian metal to deliver it on the exchange before the restrictions came into place. Any move by the LME would also have ramifications beyond the warehouse flows. For example, some contracts between producers, traders and consumers stipulate that the metal should be “LME deliverable,” meaning that a ban by the LME could lead to contracts being broken. Banks often insist that the metal they finance should be LME deliverable, because they want to be sure that, in the event of any problems, it could be sold easily on the exchange. And many traders rely on the fact that metal can be delivered to the LME when they use LME contracts to hedge their physical inventories — should they choose to, they can close the hedge by simply delivering metal. As a result, any move by the LME could create headaches for Rusal and Nornickel, as well as their biggest customers. Glencore Plc in particular has a vast multi-year contract to buy commodity-grade aluminium from Rusal.