London Metal Exchange's growing Russian aluminium problem: Andy Home

LONDON, Jan 15 (Reuters) - The amount of Russian aluminium stored in London Metal Exchange (LME) warehouses more than doubled over the course of December.

By the end of the month Russian-brand metal accounted for 90% of the exchange's warranted aluminium stocks.

There are no blanket Western sanctions on Russian aluminium and the LME has previously rejected calls to suspend the warranting of Russian brands.

Rather, the exchange has tweaked its delivery rules to reflect unilateral measures such as the penal import duties on Russian metal imposed by the U.S. government in February last year.

However, the LME's balancing act is looking increasingly precarious given the rising inventory of Russian metal and the steady creep of government restrictions on both flows and trading of that metal.

INDIAN DRAWDOWN

LME-registered stocks of Russian aluminium were 93,750 metric tons at the end of January 2023, accounting for 41% of total on-warrant inventory.

More than half of what was in the LME storage system was Indian-brand metal and that remained the case until May 10, when a massive 132,750 tons were cancelled.

There were more hefty cancellations later in May and early June to the point that by the end of June just over half of all registered aluminium tonnage was sitting in the cancelled warrant category.

It's clear that much of this activity involved Indian brands. The amount of on-warrant Indian aluminium fell from 228,800 tons at the end of April to 49,375 at the end of June.

It's worth noting that most of the cancellations took place at Malaysia's Port Klang and that much of the metal is still there. Some has trickled out in recent months but the location still holds 156,025 tons of cancelled aluminium, dwarfing on-warrant tonnage of 57,725 tons.

RUSSIAN FLOOD

The amount of Indian-brand aluminium on LME warrant closed 2023 at just 32,950 tons, its share of the on-warrant total sliding to 8.8% even as headline LME stocks grew strongly in December.

Deliveries on to LME warrant totalled 171,000 tons last month and it's obvious most of what was delivered to the South Korean port of Gwangyang, Malaysia's Port Klang and Taiwan's Kaohsiung was Russian-brand metal.

LME on-warrant stocks of Russian metal surged from 154,775 to 338,375 tons over the course of December.

Up to now Russian aluminium has circulated through the LME system. There are evidently enough consumers, particularly Chinese, happy to take the stuff to keep things ticking over.

But the scale of the recent deliveries will test the market's appetite for Russian metal.

SANCTIONS CREEP

Not least because Western governments are steadily imposing more restrictions on Russian aluminium.

Penal duties on imports in both the United States and Britain did not pose much of a problem for the LME. There were no registered stocks of Russian aluminium in either country, meaning the exchange could simply suspend fresh deliveries in both jurisdictions.

However, the sanctions net is steadily tightening.

The British government effective Dec. 15 prohibited its citizens from acquiring, importing, supplying and delivering Russian-origin metal.

The LME's UK members and any UK clients can still trade normally any metal they owned prior to that date.

But if they bought LME-warranted Russian aluminium after Dec. 15, they can only hold and sell that metal, not take physical delivery or re-warrant it in the LME system, according to exchange guidance.

That complicates the stocks financing trade and is likely to reduce risk appetite for Russian metal among part of the LME market membership.

Meanwhile, the European Union is also slowly closing the door on Russian aluminium.

A new sanctions package adopted by the European Council on Dec. 18 targets Russian imports of aluminium wire, foil, tube and pipe.

The LME only trades primary aluminium ingot so the latest sanctions don't have any direct impact on exchange trading.

But it's the direction of travel the LME should worry about. Industry association European Aluminium has called on the European Commission to extend sanctions to cover primary metal.

This is still a contentious issue for many European users. The Federation of Aluminium Consumers in Europe (FACE) has hit back. It argues that with Europe 85% dependent on aluminium imports, smaller products producers need every supply option, not least Russian producer Rusal's low-carbon metal.

However, Russian supply to Europe has been steadily declining since Moscow's invasion of Ukraine in 2022 as more companies seek out alternative suppliers.

Russian imports accounted for just 9% of total imports and 5% of European consumption last year, according to European Aluminium, meaning the potential negative impact of any further sanctions is also steadily lessening.

Were the European Union to revisit the issue of Russian primary metal, it would affect a far bigger part of the LME's user base.

BALANCING ACT

The LME will likely continue to tightrope-walk its way through the tricky issue of how to handle Russian metal.

Suspending Russian brands would risk destabilising the aluminium contract since there is so little other metal currently in LME storage and Rusal's four million tons of annual capacity represents an important buffer stock for the global trade in primary metal.

However, the balancing act is getting harder with every turn of the sanctions screw. With no end in sight to the hostilities in Ukraine, it would be wise to consider the prospect of more sanctions to come.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Jason Neely)