Inventory Growth Backed by Lower Sales: Russian Aluminium, Copper, and Nickel Stocks Rise on LME
Stocks of Russian aluminium, copper, and nickel are on the rise in the warehouses of the London Metal Exchange (LME), having increased one and a half times over the past year. This trend is part of a broader global phenomenon, with worldwide stocks of these metals doubling over the year, which analysts attribute to declining demand.
As of the end of October, Russian metal stocks in the LME system reached 338,000 tonnes, representing a one-and-a-half-fold increase compared to the same time last year. Globally, the total stockpiles of metals have risen to 1.2 million tonnes, effectively doubling over the year. The share of Russian metals in the LME system, however, has decreased by 7.5 percentage points to 28.1%.
The majority of Russian reserves in the LME system consist of aluminium, which accounts for 78% of the total. Russian copper reserves stand at 45,300 tonnes, while nickel reserves amount to 29,100 tonnes. Since April 2024, when trading in Russian metals on the LME was restricted, Russian metal stocks have increased 1.8 times, compared to a 1.7-fold increase for global stocks. By October, the share of Russian metals had decreased by one percentage point compared to April.
The increase in stockpiles follows the April ban by the United States and the United Kingdom on imports of Russian aluminium, copper, and nickel. This ban led to the LME and the Chicago Mercantile Exchange prohibiting the acceptance of new shipments of these metals from Russia. Additionally, the sanctions prevent the issuance of warrants on Russian metals and restrict the purchase of these metals as part of the settlement of derivative contracts. Metals produced in Russia before April 13, 2024, are still allowed to move between warehouses under two specific types of warrants. One type permits LME members and their clients to trade these warrants freely for Russian metal produced before April 13. The other type allows UK companies to physically deliver these metals outside the UK only.
Selling metal to LME warehouses has historically been an important backup method for Russian producers, as the majority of their metal is sold under bilateral contracts. Some Russian companies issued negative forecasts about the impact of sanctions. For example, Nornickel indicated that Western sanctions would increase the risk of disruptions in the metal markets and provoke price hikes. Meanwhile, Rusal stated that the new sanctions would not significantly impact global supplies. Both companies have since shifted their focus; by the end of the first half of 2024, Rusal’s revenue share from Europe had decreased from 31% to 22%, while Asia's share increased from 31% to 42%.
In 2023, the value of contracts traded on the LME reached \$15 trillion. Despite the sanctions, the LME remains an important pricing platform for metals. Since 2006, Russia has used an LME-linked formula to set domestic prices for Russian consumers. The Russian government is also reportedly discussing the launch of aluminium trading on the St. Petersburg International Mercantile Exchange to create a distinct Russian price indicator. In October, the Vedomosti newspaper reported that aluminium trading on the Russian exchange would begin in pilot mode by the end of the year.
The LME operates through trading obligations, typically derivatives that represent commitments to buy or sell a commodity at a certain volume and price on a set date. These derivatives do not indicate the origin of the metal until physical delivery occurs. A source cited by Kommersant suggested that stockpiles on the LME are growing for a variety of reasons, including the overall state of the market and specific dynamics related to the forward curve. In most cases, it is the forward curve structure that determines whether an obligation will be settled with a paper transaction or through the physical delivery of metal.
Maxim Khudalov, chief strategist of the investment company Vector Capital, noted that inventory growth points to a lack of final demand. When shipping to clients, aluminium producers typically charge a premium for physical delivery, while storing the metal on the LME is considered a less lucrative but more guaranteed way to sell it. Despite the challenges posed by the sanctions, the LME continues to be a key platform for pricing metals, and efforts to establish a local Russian trading system are ongoing.
