Embattled London Metal Exchange Is Headed for Another Fight

(Bloomberg) -- The London Metal Exchange has faced a firestorm of criticism this year, and it’s about to get even worse.

The 145-year-old bourse is already taking heat from regulators and being sued by hedge funds and proprietary traders over its handling of a massive short squeeze in nickel in March. Now it’s lurching toward yet another clash -- this time over whether to ban Russian supplies, in a debate that is polarizing the metals world.

A survey of traders in the aluminum market carried out by Bloomberg suggests that the sector is split. While many consumers are averse to taking Russian metal, some buyers of specialized Russian products can hardly escape using it. Top US producer Alcoa Corp. has implored the LME to ban supplies from Russia, while its Russian counterpart United Co. Rusal International PJSC has hinted it may sue if it does.

The exchange formally opened a discussion earlier this month on how it should deal with Russian metal, and the debate is now coming to a head as the world’s metal miners, traders, financiers and manufacturers gather in London for the annual LME Week.

“Any move by the LME would have far-reaching implications for the metals markets,” said ING metals strategist Ewa Manthey. “Without the ban, the LME risks losing its relevance as a benchmark for global metals trading. With the ban, global trade flows risk a disruption that could last for years to come.”

The LME is considering taking action because of concerns that large amounts of unwanted Russian metal could be dumped into its warehouses as a last resort, distorting the world’s benchmark prices. 

The LME proposals -- which include a potential ban on new deliveries of Russian metal as soon as next month -- have already sparked extreme volatility, with prices jumping by an intraday record as Bloomberg first reported on the LME’s discussion paper last month. Adding to the powder-keg trading conditions, the White House is also weighing potential measures that could restrict the flow of aluminum into the US, or even result in sanctions on Rusal, the largest supplier outside China.

On Monday, five industry associations representing thousands of small and medium-sized industrial companies in Europe together urged the European Commission to intervene against any bans of Russian aluminum, warning that such a move could be devastating. 

Dividing the Market

While market participants have until Friday to submit their responses to the LME, interviews with metal producers, traders and consumers show that the subject is already dividing the market. 

Bloomberg polled a dozen traders in the global physical aluminum market, including at several of the largest players in the business. The poll revealed that a significant proportion of buyers are unwilling to take Russian metal, not only in Europe but also in the US and Asia. But it also showed that there are also still many who are willing to buy, particularly if the price is right and financing is available.

The deteriorating economic outlook is also muddying the debate, as many manufacturers look to cut purchases of metals of all origins. And as it solicits views across the market, the LME has indicated that it is particularly interested in the stance of consumers of metal. 

Some traders say that a large majority of their customers don’t want Russian supplies in discussions about contracts for 2023. Mark Hansen, chief executive of trading house Concord Resources Ltd., said that about 90% of the customers for the roughly one million tons of aluminum he sells are refusing to buy Russian metal.

He cited reasons including “lack of financial institution support for the Rusal brand in commercial transactions, moral concerns over the Russia-Ukraine war, anticipation that the LME will delist Russian metals, and the likelihood that governmental sanctions on Rusal from the USA, EU and UK are imminent.”

Another large aluminum trader, who asked not to be identified discussing private information, said that between 65% and 85% of their customers globally were refusing to buy Russian metal under new contracts.

Nuanced Picture

But others offered a more nuanced picture, stressing extreme variations between sectors and regions. In the markets for some of Rusal’s more specialized products -- which are widely used in critical industries including aerospace and defense -- self-sanctioning was said to be less widespread, due to a lack of alternative suppliers.

In Japan, some larger traders have been refusing to take Russian aluminum in upcoming quarterly contracts, according to two of the respondents. 

Another trader said he expected about 30% of clients in Asia would be happy to take it if prices were favorable, but several said financing such transactions is proving difficult due to even stricter self-sanctioning by banks.

So far, Rusal -- Russia’s giant aluminum producer -- has received indications from customers that they will buy metal amounting to 76% of its planned production for next year, providing the company isn’t hit with sanctions, a person familiar with the matter said.

While some customers have signaled that they won’t sign new contracts in 2023, that has been largely offset by rising sales to other customers, including new customers in Europe. The sales volumes under negotiation are down about 12% to 13% on levels seen at the same point in last year’s mating season, but this is partly reflects a broader economic slowdown.

Russia’s MMC Norilsk Nickel PJSC is bracing for a double-digit percentage drop in sales into Europe, and is preparing to reroute more metal to Asia, according to a person familiar with the matter. 

In aluminum, notable exceptions to the self-sanctioning trend include buyers of Rusal’s specialist value-added products, such as Constellium SE -- which said earlier this year it buys about 4% of its metal from Russia. Constellium declined to comment. 

Glencore Plc, which renewed a long-term supply deal with Rusal in 2020 that was worth $16 billion at the time, is also expected to buy huge volumes of Rusal’s commodity-grade metal under the contract next year. Yet, in an indication of how the issue is dividing the industry, US aluminum producer Century Aluminum Co., in which Glencore owns a 43% stake, has -- like Alcoa -- been lobbying for the US to impose sanctions on Russian aluminum, according to people familiar with the matter.

While the debate in the market simmers on, traders have been watching as large volumes of aluminum flowed into the LME system in the past week -- followed by two days of big orders to withdraw metal. However, much of the increase was not of Russian origin, according to people familiar with the matter, meaning that for now it’s unlikely to impact the debate.

Given the lack of unanimity in the market, it seems inevitable that the LME will anger some market participants, no matter what it chooses to do. Two traders with a large footprint in the global aluminum market said they’d support a less-drastic solution that would set limits on Russian inflows while still leaving the door open for consumers to buy it in times of tight supply.

Still, the idea of a middle way, which was floated by the LME in its discussion paper, also has detractors, who argue that it would be hard to implement successfully and leave the rules open to being gamed by canny traders. One senior trader who was surveyed by Bloomberg said that any such restrictions risked doing more harm than good.

--With assistance from .

(Updates with European industry associations in eighth paragraph.)

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