LME Russia survey shows deep split in metals market

The London Metal Exchange's (LME) survey of users that informed its decision on 11 November to not restrict the warranting of Russian metal in its warehouse system has laid bare a major, and largely geographic, split in metals market participants' views that is likely to ensure the issue remains disruptive to trade for the foreseeable future.

Of the 42 respondents to the survey, 22 — just over half — favoured the LME's option A of not making major changes to its handling of Russian metal. But 17, or 40pc, called for the exchange's option C of an outright ban on warranting new Russian metal.

The LME said that North American-based respondents tended towards a ban, while Asia-based respondents tended towards no action, with respondents from Europe — the largest source of inputs at 25 — more evenly divided.

But the division in the European response may be misleading. Feedback from individual metal consumers was limited but the LME did receive a small number of responses from industrial trade associations, which in Europe have largely vocally lobbied against a ban on Russian metal in the LME system.

The LME cited opposition from five European aluminium trade groups as an indication that "for the most part, a material portion of the market is still accepting — even relying on — Russian metal, and there is insufficient evidence to conclude that this position is likely to change in the near future".

And European copper, aluminium and nickel traders surveyed by Argus this week were largely in favour of the LME's decision.

Some traders shared the LME's preferred view that the decision on banning Russian material is to be made by democratic governments, saying the "LME should not have a political function".

Other copper and aluminium market participants highlighted the importance of preserving supply, saying that "Europe needs Russian material" and not banning the warranting of Russian-origin material is important for market flows.

Security of supply was even more of an issue for nickel, to the extent that many respondents to the LME survey that favoured a ban on Russian metal acknowledged that nickel should not be subject to any such measure as it could destroy the LME nickel contract, which is already struggling with liquidity.

One metals trader told Argus: "LME's Russia decision was very much on the expected lines. Most of the ‘blanket ban' pressure was being applied on the LME by the US. With over 50pc of US supply coming from Vale, there is greater self-sanctioning going on over there.

"But a ban on Russian nickel would have been disastrous for Europe and Asia, particularly with the thin liquidity and given that (Russian producer) Nornickel continues to be the main source of European metal. China is a major source of nickel liquidity, they are happy to trade Russian nickel so it had to be business as usual."

Uncertainty persists

The diversity of outlooks on Russian metal on the LME, and the opacity of the extent to which self-sanctioning is taking place, means the exchange's decision to proceed with the existing state of affairs is unlikely to restore certainty to trading conditions moving forward into 2023.

The situation could change very quickly in the event of official sanctions being placed on Russian aluminium, nickel and copper by the US and the EU. And any further decrease in banks' willingness to finance Russian material could require renewed intervention from the LME.

Even in the absence of new major developments, simply maintaining things as they are may potentially distort LME trade. Base metals markets are becoming bifurcated between higher-cost non-Russian material sought by self-sanctioning buyers and lower-cost Russian material.

The LME acknowledged that in circumstances where buyers prefer non-Russian metal, higher than usual proportions of Russian metal will be warranted in warehouses, and that this would likely result in prices converging on a Russian price that is discounted versus the price of non-Russian metal — essentially threatening the status of the underlying LME price as a reference for the actual market value.

The exchange said that regional premia to LME prices will be an essential tool to address this disparity, stating that they should "adjust to reflect a larger proportion of the 'all-in' or 'real world' cost of metal, allowing non-Russian producers to continue to receive fair market value for their metal".

While it acknowledged this was not an ideal solution, the LME indicated the market is better structured to manage a lower LME price combined with higher premiums, rather than a higher LME price and a discount for Russian metal.

By Ronan Murphy, Raghav Jain and Corey Aunger