Russian Aluminum Stocks Surge on LME Amid Sanctions
Aluminum stocks from Russia have significantly increased on the London Metal Exchange (LME) following sanctions imposed by the US and the UK in April, as reported by Bigmint in their June review. The stockpile rose by 33% year-on-year in the first half of 2024, reaching 695,372 tons, with most of the metal stored at Port Klang, Malaysia. Despite this, the average LME aluminum price saw a modest increase of 2% to $2,403 per tonne in the same period.
The sanctions, effective from April 12, banned direct imports of aluminum, nickel, and copper from Russia into the US, and prohibited their trading on the Chicago Mercantile Exchange (CME). Similarly, the UK, which had already stopped purchasing these metals from Russia, banned their trading on the LME. By March 2024, Russian aluminum constituted up to 91% of the stocks in LME warehouses.
The sanctions have caused uncertainty in the global aluminum market. Despite a spike in aluminum prices to over $2,610 per tonne in May, the growing inventories led to a decline to $2,550 per tonne by the end of June.
The LME, which bases its trading on commodity documents (warrants), suspended the warrants for Russian metals produced after April 13. This rule change aimed to limit market confusion, though operations with Russian products remain possible for participants outside the UK.
UC Rusal, Russia's largest aluminum producer founded by Oleg Deripaska, experienced a 13% decline in IFRS revenue to $12.2 billion in 2023. Net profit plummeted 6.4 times to $282 million, and adjusted EBITDA fell 2.6 times to $786 million, due to geopolitical tensions and supply chain disruptions.
Despite these challenges, UC Rusal increased primary aluminum sales by 7% to 4.2 million tons in 2023. Sales distribution showed a notable shift with 32% in the domestic and CIS markets, and 38% in Asia, compared to 27% in 2022. Sales in China more than doubled, aiding in the reorientation of exports.
Alexander Popov, UC Rusal's CFO, explained that LME warehouses do not belong to the exchange and that most contracts are hedged, involving direct shipment to buyers rather than storage. He highlighted that the new sanctions might deter traders from financing Russian metal due to origin risks, particularly for US-focused businesses.
Bloomberg reported in April that the new sanctions could threaten 36% of UC Rusal’s sales, potentially reducing production to its lowest since 2008. UC Rusal’s presentation noted that in 2023, the US accounted for 32% of revenue, with the EU contributing 28%.
Estimating the depletion of Russian aluminum stocks in LME warehouses is challenging. Yaroslav Kabakov, strategy director of Finam, suggested that stocks might last several months to a year, depending on consumption and alternative supply sources. He predicted that prices could increase by 10-20% to $2,800-3,100 per tonne by the end of 2024 once these stocks are exhausted.
Boris Krasnozhenov, head of securities analytics at Alfa Bank, noted that the rise in aluminum stocks at the LME partly reflects a low base from the previous year. He indicated that stockpiling often serves as a last resort for producers unable to find end buyers.
