Aluminium and nickel futures are on the rise after the London Metal Exchange said that it might ban new deliveries of Russian metal. The news added $155 a tonne to the price of aluminium and nearly $1,700/t to the price of nickel overnight.
Nothing has been decided yet. The LME said that at this stage it was only “considering a consultation” on stopping future deliveries of Russian metals into LME warehouses but this is very likely the first step towards an actual ban. If put in place aluminium and nickel would be the most affected of all the LME traded metals because the country’s aluminium producer Rusal and nickel giant Norilsk Nickel account for 6% and 7% of the global production, respectively. Russia is also a significant producer of copper and zinc.
Paper markets versus physical metal
In futures trading what is traded is just a paper rather than the actual metal and as traders roll positions over from one month to the next they normally don’t take delivery of the metal. But the contracts are backed by metal stored in LME warehouses. If the Russian metal is no longer permitted on the LME futures prices will start behaving as if there is an actual physical shortage of the metal.Most of the actual physical metal trade completely bypasses the LME and instead is bought and sold via direct longer-term contracts between producers and end users, like manufacturers of specific metal products such as aluminium sheet makers. The prices are negotiated on an annual basis and are based on LME futures prices. With bans in Europe and the UK on Russian oil and gas, and the escalation of the political situation in Russia and Ukraine there are concerns that Rusal may not be able to sell its aluminium in the currently ongoing supply negotiations for next year.
Alarm bells rang when Novelis, a subsidiary of Indian industrial giant Hindalco Industries and one of the world’s largest buyers of aluminium, said it wouldn’t buy Russian metal for its European factories next year. However, there isn’t blanket avoidance of Russian metals and for instance, buyers in Spain continue to buy Russian metals.
If Rusal isn’t able to negotiate its contracts there are concerns that it may try and “offload” its metal into LME warehouses, a situation the LME would prefer to avoid.
Cushioning the fall
The LME’s musings come at the time when the aluminium market is struggling with falling demand. High inflation across the Western world and the aftermath of Covid in China have been eroding prices throughout this year, except in March when they spiked because of the start of the war in Ukraine. Production cuts have followed, not only because of weaker demand in Europe and the US but also because rising electricity prices made it difficult to continue producing in high-cost areas such as Western Europe. So far the cuts have not been enough to fully stem the decline.
However, the LME’s plans are now providing a barrier to further falls. The final decision is likely to take place before the end of October when the global metals industry will meet in London for the annual London Metal Exchange Week. With many deals negotiated on the side lines of this event, it will be very clear if Russian producers will still be able to sell their metal in Europe.
WisdomTree Aluminium and Nickel ETFs
Product Name | ISIN | Exchange Ticker | Listing Currency |
WisdomTree Aluminium Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi |
GB00B15KXN58 | ALUM | USD |
WisdomTree Aluminium 2x Daily Leveraged Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B2NFTC05 | LALU | USD |
WisdomTree Nickel Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi |
GB00B15KY211 | NICK | USD |
WisdomTree Nickel – EUR Daily Hedged EQi |
JE00B6XL6W59 | ENIK | EUR |
WisdomTree Nickel 1x Daily Short Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B24DKJ77 | SNIK | USD |
WisdomTree Nickel 2x Daily Leveraged Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00BDD9QB77 | LNIK | USD |
WisdomTree Nickel 3x Daily Leveraged Interactive Investor | AJ Bell Youinvest | EQi |
JE00BYQY5X15 | 3NIL | USD |