Looming Russian export tax jolts metals markets

Metals market participants are taking stock of Russia's plan to impose export duties on various ferrous and non-ferrous products exported outside the Eurasian Economic Union (EAEU), with nickel and aluminium prices jumping this morning and some ferro-alloy traders rushing to get Russian material trucked across the border before they come into effect.

Russia's ministry of industry and trade yesterday proposed duties that would come into effect from 1 August-31 December 2021 in order to protect the domestic market. The income from the duties will be used "to compensate" for rising metal prices in Russia's domestic market, the ministry said, with first deputy prime minister Andrei Belousov commenting that Russia's economy is not ready for an "avalanche-like shock transfer" of global metal prices to the domestic market.

The ministry's recommendation encompasses a range of products including steel, ferro-alloys, copper, nickel and aluminium. The base tax rate would stand at 15pc, with each product then incurring a specific duty — at least $150/t for ferro-alloys, at least $1,226/t for copper, $2,321/t for nickel and $254/t for aluminium.

For now, many market participants are watching and waiting to see if the duties come into effect and how they will impact dynamics. A couple of Russian ferro-tungsten producers appeared unfazed today, saying they are continuing to do business domestically as normal.

But elsewhere, an impact is already visible, with several companies dispatching trucks to collect Russian material — ferro-titanium and some other products — and get it across the border before any duties come into force, a trader said. With so many trucks diverted, some other metal deliveries in eastern Europe and Poland are being disrupted, with a trader in Estonia saying he had just lost out on a scheduled delivery to Germany because there are no trucks available.

A Russian ferro-titanium producer is considering reducing output if the duties go ahead because domestic prices are not high enough to make continued smelting profitable, they told Argus. Producers and traders of western grade ferro-titanium said some Russian producers have approached them to buy material to cover long-term contracts, fearing they will be unable to move enough material ahead of 1 August.

Meanwhile, the announcement has quickly jolted base metal prices, with the LME three month (3M) nickel contract rising by 2.2pc to $18,563/t in this morning's trading session and the LME 3M aluminium contract increasing by 1.9pc to $2,470/t.

The copper market has been less reactive so far, but still stands to be impacted, given Russia's role as a major exporter. Russia exported 775,848t of refined copper in 2020, around half of which went to Europe, Russian customs data show, underscoring the continent's significance as a buyer.

Europe faces higher nickel premiums

The export duty would have significant implications for nickel availability and pricing in Europe. Russia is the largest single supplier of nickel to Europe, and Europe is Russia's largest nickel export market.

Russia accounted for 180,000t, or 28pc, of all EU nickel imports in 2020, and supplied 19.4pc of the trading bloc's unwrought nickel imports. Russian material comprises the bulk of refined nickel product currently trading in the continent, a leading trader told Argus.

With most of Russia's nickel production going to the export market, suppliers are unlikely to limit overseas sales. They will need to absorb the bulk of increased costs themselves but are likely to try to restore margins by hiking prices.

Given the extent of Europe's exposure to Russian nickel, it is likely that the export duty will drive European nickel premiums higher. European nickel premiums have been suppressed by healthy supply and limited spot trading since late 2019, but any squeeze in Russian availability or increased underlying prices will lend support. Argus assessed the weekly full-plate nickel cathode in-warehouse Rotterdam premium at $40-70/t yesterday.

A major point that needs clarification is whether the new export duty will apply to all nickel products. If the tariff applies to raw nickel concentrate or other feedstock, it could disrupt Nornickel's shipments of feed from its Russian mines to its Harjavalta refinery in Finland. The site currently produces 65,000 t/yr of refined nickel products.

Aluminium premiums to adjust

There is likely to also be an impact on global aluminium premiums as Russia is a major supplier of primary aluminium to net-importing regions.

The EU sourced 9.31pc of its unwrought aluminium imports from Russia last year, national imports statistics show, although that figure has been diminished by the economic impact of Covid-19 and the attractiveness of prices in Asia, which ramped up Russian imports in the past two years.

"As Rusal is a marginal supplier to many net-importing regions/countries, global premiums will have to increase by the equivalent," an analyst said. "The US, Europe and Japan all [traditionally] take Russian metal in large quantities."

Russian imports into Europe make up a large part of the region's duty-unpaid aluminium market, as Russian metal is granted that status in the EU. Duty-unpaid premiums are therefore likely to further narrow the gap to duty-paid premiums, which nominally stands at 3pc of the LME aluminium price in line with the duties but has narrowed as the duty-unpaid market has tightened this year, partially as a result of more Russian metal making its way to Asia and other regions outside Europe.

Argus' assessment for duty-unpaid aluminium premiums in Europe stands at $205-215/t, while duty-paid premiums are at $250-260/t. At current LME aluminium prices, the duty would be just over $70/t.