Last Friday (April 13), the US and the UK announced new trade restrictions on Russian aluminum, copper, and nickel. In response, the London Metal Exchange (LME) announced the suspension of issuing warehouse receipts for Russian metals produced after April 13.

On Monday, LME non-ferrous metals futures opened sharply, but then the increase narrowed. The LME aluminum benchmark contract rose nearly 6%, the LME nickel benchmark contract rose 3.6%, the LME copper benchmark contract rose 0.49% to 9,453 US dollars/ton, and the LME zinc and lead benchmark contract declined.

Market participants are divided about the wider impact of the British and US sanctions against Russian metals: some believe that removing one of the largest metal producers from the market would drive up prices; others are concerned about the prospect that large amounts of old Russian metals (which are still allowed to be traded) will pour into LME.

The subconscious rise in non-ferrous metals was to be expected

Russia is an important metal producer, accounting for 6% of the world's nickel supply, 5% of aluminum supply, and 4% of copper supply. Its status in LME is even more important. Take nickel as an example. Norilsk Nickel has long been the largest supplier of refined nickel, and refined nickel is the only nickel delivery product accepted by LME.

As a result, market participants already generally expect aluminum, copper and nickel prices to rise on Monday, but their predictions for increases vary, from a few percentage points to 10%. Since the “demon nickel” storm, LME has implemented daily increase limits to prevent copper and aluminum prices from rising by more than 12% in one day, while nickel price increases are limited to 15%.

The escalation of hostilities in the Middle East could also trigger unrest. Alastair Munro (Alastair Munro), an agent of Marex Group, said, “From a price point of view, it naturally tends to be higher. But on the contrary, we also need to see if any funds or traders have had to reduce their positions due to increased volatility, which would be interesting.”

Many metals traders and brokers have been working all weekend speculating on the impact of the new sanctions on the market. The announcement coincided with the official opening of the industry's top event “Cesco Week” (Cesco Week) in Santiago, the capital of Chile.

Could the actual impact be limited?

Traders have been surprised to see the risk of sharp fluctuations in the metals market and the tense weekend, especially after experiencing the epic runaway war in March 2022 that almost destroyed LME's reputation, and sanctions against United Co Rusal International PJSC (United Co Rusal International PJSC) in 2018.

However, traders and executives said that the new restrictions are unlikely to have as much impact as the two incidents mentioned above.

The dispute between Russia's two major metal giants, Rusal (Rusal) and MMC Norilsk Nickel PJSC (MMC Norilsk Nickel PJSC), and the Western financial system has been easing compared to before the Russian-Ukrainian conflict. Over the past two years, the industry has been preparing for possible sanctions.

By targeting Russian metal supplies produced after April 13, sanctions have divided the supply in the metals market into three categories: new Russian metals, which are currently prohibited from being delivered to LME; old Russian metals produced before April 13; and non-Russian metals.

LME confirmed on Saturday that Russian used metals can continue to be delivered, but the exchange added that it needed evidence that the metals did not violate sanctions and would approve deliveries on a case-by-case basis.

LME's approach is actually enforcing restrictions imposed by the US and the UK last Friday. But it could re-ignite a debate over whether Russian metals should be banned altogether to protect the exchange's position as a global benchmark. If Russian supply continues to be allowed, the metal price set by LME is likely to increasingly equal the price of old Russian metal.

By the end of March, Russian metals had accounted for 91% of LME's aluminum stocks, 62% of copper stocks, and 36% of nickel stocks. Traders now expect a batch of old Russian metals previously stored outside of LME to flow into LME because their owners are concerned that new trading restrictions may occur in the future.

Russia accounts for more than 90% of LME aluminum stocks

As far as the aluminum market is concerned, the amount of Russian aluminum held outside of LME ranges from hundreds of thousands of tons to 1 million tons.

The LME acknowledged in a notice last Saturday that the uncertainty caused by the sanctions meant that a “relatively large” supply of old Russian metals could pour into the exchange.

The influx of supply of old Russian metals is likely to depress spot prices and lower the price of forward contracts. This situation, known as futures premiums, usually indicates sufficient supply in the market.

Copper, aluminum, and nickel futures prices are already at historically high levels, partly because Russian metals have a growing share of the exchange, and only a few consumers, traders, and brokers are willing to engage.

As far as LME is concerned, it considered banning imports of Russian metals in 2022, but ultimately decided not to do so on the grounds that Russian metals are still circulating in the physical market and the exchange should not act outside of sanctions requirements.

On Saturday, the exchange said it would continue to evaluate its Russian metal positions, but emphasized that traders continued to receive Russian aluminum from LME warehouses in January, February and March.

The new rules announced by the United Kingdom and the US last Friday also include a clause that will make it easier for traders to accept old Russian metals. Although the metal sanctions announced by the UK in December last year initially prohibited Britons from requesting delivery of Russian metals from LME, the UK government has now lifted this restriction as long as these metals enter the exchange's system before April 13.

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 is probably the most extreme.

He said, “The initial reaction will definitely be a degree of panic, and nickel is probably the most aggressive. However, the market tends to adapt quickly to such shocks.”