On April 12, 2024, local time, the United States and the United Kingdom announced new restrictions on transactions involving Russian aluminum, copper, and nickel. In conjunction with this, the London Metal Exchange (LME) introduced new regulations related to Russian metal sanctions and issued Notice No. 24/171 on April 14th with the following summary:
According to the new regulations, as of April 13, 2024, the aluminum, copper, and nickel produced on or after this date cannot be used for trading on the LME and CME. Metals produced before April 13th are not affected by the new rules. Additionally, the United States has prohibited the import of these three metals from Russia.
Historically, the LME discussed banning metal deliveries in 2022 but was unable to effectively enforce it. Phase I: On October 5, 2022, the LME specified that metal from UMMC and its subsidiaries could only be warehoused if the owner could prove compliance without violating sanctions. Phase II: On December 14, 2022, the British government announced a ban on British citizens and companies from transacting in various metals from Russia, stating that British individuals "may not directly or indirectly purchase metals originating from or located in Russia."
Even before this announcement, both the European Union and UK governments had already begun to restrict Russian copper transactions on a smaller scale, with European copper consumers initiating a boycott of Russian copper. This led to a clear reduction in Russia's direct sales in Europe and a change in trade flows.
Specifically, among the brands delivered through LME are NORNICKEL, NORILSK, UMMC, and UMMC II. In 2023, the total production of Russian copper cathode all brands was approximately 980,000 tons, accounting for 3.81% of global refined copper production, with an export volume of about 620,000 tons.
Breaking down the exports, Russia's copper exports to EU countries fell by 79% in comparison to 2022, to 62,400 tons, nearly half of which (approximately 111,600 tons) was redirected to China and Turkey. Exports to China were approximately 365,900 tons, marking a 15% increase compared to the previous year, while exports to Turkey reached 171,300 tons, a 61% increase.
As of the end of March 2024, Russian metals accounted for the following proportions of the London Metal Exchange (LME) inventories: Russian copper at 62%, Russian nickel at 36%, and Russian aluminum at 91%.
Short-term outlook 1: The sudden imposition of LME warehouse receipt restrictions may lead to a concentrated warehousing behavior by metal holders seeking to avoid risk, focusing on metals produced prior to April 13th. This could increase the pressure on visible inventories.
Short-term outlook 2: The divergence in prices between domestic and foreign exchanges is widening, with losses on the hedging side in the foreign market exceeding gains on the domestic spot market, potentially leading to losses.
Short-term outlook 3: As the domestic-foreign price gap widens, domestic export windows may open, with mainstream smelters likely to increase their export efforts. On April 15th, the domestic morning market opened with import losses having expanded to over 1300 yuan per ton.
Short-term outlook 4: Significant fluctuations in prices on foreign exchanges increase the financial pressure on related Chinese companies investing abroad. Since sanctions currently do not involve existing stocks and have not set an upper limit, they will not impact deliveries for the time being. In the short term, the market is also focused on the disturbances caused by concerns over copper supply, with a key focus on the increasing risks of intensified sanctions from Europe and America.
Considering the medium to long term cycle, since 2022, Russian metals have been "shifting east". Under the intensification of new sanctions, this trend will continue to affect the logistics of Russian metals, and may even alter the long-term domestic to foreign price ratio for copper, directing more supply into countries including China. Because Russian copper in China is often brokered in large contracts by traders who then supply downstream industries, this may augment the pressure on hidden inventories.
