Russian aluminum leads to economic failure of the LME aluminum market
The quotations on the LME, the London Metal Exchange , are, to a certain extent, an indicator of world metal prices, even if each region has its own specific indices. But lately there are some doubts that this index is a reliable indicator.
The main concern that keeps buyers up at night is the supply/demand position . In particular, the concern stems from the oversupply of Russian aluminum and the limited supply of non-Russian metal on the exchange. This situation could potentially lead to an excess of stock metal coming from a supply source that too few buyers are willing to use. This, in turn, could cause the LME price to trade at a discount to its actual value.
Last month, we reported wild swings in Contango/Backwardation on the LME. This mainly stemmed from merchants competing for parcels of non-Russian brands. However, the scarcity of non-Russian metal has far-reaching consequences beyond the exchange itself. The price and quantity on the market are not realistic, because a large part of the companies do not have access to them, so the doubt is that the market is not functioning.
Aluminum prices, China and the LME's Russian Metal Problem
According to Reuters, Russian brands accounted for about 80% of guaranteed aluminum inventories on the LME by the end of June. Furthermore, the situation has probably gotten worse since then. Asian warehouses stock a significant portion of this metal, as China has been the largest consumer of Russian metal, both directly and from the LME. However, Reuters noted that China's appetite for the Russian primary metal appears to be weakening. Last year, trade between Russia and China was robust, with China exporting alumina to Russia and receiving primary bullion in return.
This trade was beneficial to China, especially during a drought in Yunnan that reduced its smelting capacity. Indeed, Chinese imports of Russian-brand primary aluminum increased from 291,000 tons in 2021 to 462,000 tons last year. The pace of imports accelerated further during the first half of this year, with metal imports from Russia rising 177% year-on-year to 414,000 tonnes. At the time, Russian aluminum accounted for 85% of Chinese imports. Russian aluminum ends up in China, as it doesn't go to Western markets.
Aluminum rebound in China and Turkey's cunning
But in China it has started to rain again, due to an increase in water supplies, China's domestic production rebounded by three quarters of a million tons year on year in the second quarter. This raises the serious risk that Chinese imports of Russian equipment will decline in the second half of the year. Meanwhile, Russia has continued to find customers for its primary metal which then, perhaps, ends up in Europe anyway.
Now European aluminum producers are now expressing concern about Turkish semi-finished products flooding the market, supported by cheap Russian primary metal. Indeed, the potential loss of a significant portion of Chinese demand could result in more Russian metal flooding into the LME. This could lead to an almost exclusively Russian metal pool with limited buyers. This, in turn, could potentially weaken LME aluminum prices relative to those physical buyers who would have to pay for the non-Russian metal.
An issue worth considering
The LME could argue that mechanisms exist to address such distortions. Examples include the physical delivery premium, which has always been a measure of regional versus global demand.
However, this award is unable to reflect specific brands or origins. As previously reported, the LME has periodically reviewed and decided not to ban deliveries of Russian metal. One reason for this is concerns about the legal consequences, as Russian metal is not subject to sanctions. If a fixed and stable discount on Russian aluminum emerges, this could open up the possibility for a price reporting agency to launch a non-Russian delivery premium. Perhaps the only real solution to an otherwise unsolvable problem.
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The article Russian aluminum leads to economic failure of the LME aluminum market comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/lalluminio-russo-porta-al-fallimento-economico-del-mercato-dellalluminio-lme/ on Sun, 13 Aug 2023 12:30:04 +0000.