Russia sanctions to prompt flows of Rusal metal into LME warehouses

Aluminium market participants expect stocks held in London Metal Exchange (LME) warehouses to climb because banks and traders can park metal from Russian producer Rusal there in the wake of US sanctions. Last week the US Treasury Department imposed sanctions on seven Russian oligarchs and 12 firms they own or control, saying they were profiting from a Russian state engaged in "malign activities" around the world.
This includes Hong Kong-listed Rusal, which analysts at CRU say accounts for 14 percent of supplies outside top producer China. Global output this year is estimated at 65 million tonnes. Metal flows into LME warehouses during times of low, or no, demand - confirming the exchange's status as a market of last resort. This is particularly pertinent in periods of recession.
The London Metal Exchange on Tuesday said Rusal's aluminium would be suspended from its list of approved brands from April 17 after some members raised concerns about settling contracts with sanctioned companies. Rusal's metal in LME warehouses before April 6 is not affected, but sources say few companies will want to hold it.
"LME stocks will go up because if you are a financing bank holding Rusal's metal, you will be looking to cut that exposure," a source at a commodity trader said, adding that the contango would rise. Contango is a reference to the discount for metal for nearby delivery against the longer-term contracts, normally because of surplus metal.
Data from the exchange showed aluminium stocks in LME warehouses originating from producers in Eastern Europe stood at 450,650 tonnes as of April 6. Sources say this category would mostly be metal produced by Rusal. That is about 36 percent of total aluminium stocks at 1.26 million tonnes as of that day.
"Rusal will struggle to find buyers," said Oliver Nugent, commodities strategist at ING in Amsterdam. "I wouldn't be surprised to see large deliveries coming in, any bank sitting on Rusal's stock will want to move it to the LME." Banks involved in metal trade financing are likely to be extremely cautious after French bank BNP Paribas in 2015 paid $8.9 billion to settle claims it violated sanctions against Sudan, Cuba and Iran.
"The contamination risk for some banks is too great, their metal will go to LME warehouses," another commodity trader said. "If you can trade through a currency other than the dollar, it should be fine, but even a reference to a dollar price on a contract could be breaking sanctions." Sources say a dominance of Rusal's aluminium in LME inventories means prices on the exchange may not reflect fundamentals and non-Rusal metal will trade at a premium.