In December, Russian aluminum inventories at LME warehouses doubled due to British sanctions

Aluminum stocks from the Russian Federation increased sharply in LME warehouses after the imposition of UK sanctions on trade in Russian metal. Although the situation on the LME does not have a direct impact on Rusal, it reflects the growing difficulties the company faces in selling its metal amid weakening global demand for aluminum and the loss of traditional markets in Europe. According to analysts, the increase in inventories is primarily associated with weak demand, but may also indicate the desire of traders to accumulate metal in anticipation of improving conditions.

In December, Russian aluminum reserves in the warehouses of the London Metal Exchange (LME) doubled, to 340 thousand tons, according to exchange data. A sharp increase was recorded after sanctions from the UK, which banned its companies and citizens from trading aluminum, copper, zinc and lead produced in Russia. Russia’s share in the global aluminum market is about 6%, high-grade nickel – 17%, copper – about 3%.

LME has received a special license from the UK authorities allowing it to continue to buy warrants for the metals. Now Russian aluminum accounts for up to 40% of the reserves of all metals on the LME and 90% of aluminum reserves. Trading through the LME is mainly carried out by traders. Large metallurgical companies, as a rule, sell their products to end consumers under long-term contracts.

Most likely, the reason is a decrease in global demand for metal against the backdrop of significant supplies from China, comments independent industrial expert Maxim Shaposhnikov. Also, the increase in inventories can be explained by traders’ expectations of the beginning of a reduction in the key rate in the United States, which could boost commodity prices, so some of the metal is kept in warehouses. The analyst points out that exchange warehouses are used to store part of the metal already purchased by buyers.

Nevertheless, the fact that Russian aluminum reserves are growing reflects Rusal’s growing problems with metal sales in a situation where global demand remains weak. The Russian Aluminum Association said in December that many of Russia’s traditional sales markets have been lost, and work in others is complicated. In particular, the USA, Great Britain and Australia introduced protective duties on aluminum from the Russian Federation (270%, 35% and 35%, respectively), and in the EU key processors themselves refused to purchase Russian metal. “Due to the stagnation of a number of Western economies and slowing growth in Asia – and, as a result, a surplus of metal – competition on the terms of metal supply has intensified significantly on world markets, exchange prices for aluminum are at a record low since March 2021, and regional premiums prices fell to a three-year low,” the association reported. Under these conditions, Rusal applied to the Ministry of Industry and Trade with a request to exempt a number of its factories from the exchange rate export duty (see Kommersant, December 18, 2023), but the decision has not yet been made. The exchange fee is 4–7% depending on the ruble exchange rate. According to My Investments analysts, Rusal suffers more than other mining and metallurgical companies from the duty: the effect on its EBITDA is 19–22%.

Rusal’s competitors, who are also suffering from decreased world prices for aluminum, are trying to use sanctions to push Russian metal out of at least Western markets. Thus, the Norwegian manufacturer Norsk Hydro in July 2023 proposed to the LME to reconsider the decision not to prohibit the storage of Russian aluminum in the stock exchange warehouses, since large volumes of metal of Russian origin allegedly jeopardize the reference status of its aluminum contract. LME refused, noting that aluminum from the Russian Federation continues to be consumed by many market segments. In 2022, LME was already consulting on a ban on the supply of aluminum, copper and nickel from Russia to its warehouses. At that time, such a solution was promoted by the American Alcoa, but to no avail.

Evgeniy Zainullin