High Russian aluminium export volumes and the threat of market distortion

The 24th of February 2022 is a date forever etched into European history as the day when Russian forces launched an unprovoked invasion of Ukraine, triggering a full-scale war. In response, both governments and major multinational corporations swiftly imposed sanctions with the aim of weakening Russia's capacity to finance the war while minimizing the repercussions on the EU economy.

Now, with the war in Ukraine having surpassed the 18-month mark, inflation and high energy prices triggered by the shock of war are slowly coming down. Some industries, however, remain disproportionately impacted by the sanctions, potentially causing market distortions. Let’s take a closer look.

Balancing political and economic interests

As part of the economic sanctions, the EU has imposed a number of import and export restrictions on Russia. These measures exclude the export of products primarily related to healthcare, food, and agriculture to avoid harming the Russian population. Crude oil, refined petroleum products with limited exceptions, coal, cement, gold, and steel on the other hand, were banned from being imported to the EU. The import ban, however, does not extend to all types of material and presently only specific aluminum products, such as plates, sheets, and strips exceeding a thickness of 0.2 mm are within scope. The restrictions on import of steel products including the import quote system imposed by the EU in 2022 will further be strengthened with the prohibition of import of Russian steel processed in a third country. As a comparison, steel and iron made up 4,7 percent of Russia’s total share of export in 2021 while aluminium attributed to 1,5 percent.

In November of 2022, the London Metal Exchange (LME), the world's oldest and biggest market for industrial metals, decided not to ban new deliveries of Russian metal, citing the absence of Western sanctions on aluminum.

This is concerning on two levels. Firstly, there is a risk of the volumes of aluminium in LME warehouses rising further. Since the start of the war, the amounts of Russian aluminium in LME warehouses have been growing exponentially with the registered share of stock almost doubling from 41% to 81% between January and July of 2023. This makes it the biggest available aluminium source in the London Metal exchange.

According to LME, metals of Russian origin continue to be consumed by a broad section of the market with Turkey and China emerging as destinations for Russian metal. In the first half of 2023, for example, China’s aluminium imports – primarily from Russia – have risen to 10.7%. As capacity returns in China, however, it begs the question of whether the country can sustain such import volumes amid muted economic growth. If not, this could result in further aluminium deliveries into LME warehouses.

The second concern refers to the volume of Russian aluminium in LME warehouses distorting the pricing mechanism on the exchange. This is especially worrisome as the pricing is often used as a benchmark for contracts between producers, customers, and traders with high amounts of Russian metal therefore posing the risk of distorting the pricing mechanism.

Reconsidering the position of Russian aluminium in LME

In July, Hydro sent a letter to the London Metal Exchange, urging them to reconsider their decision not to ban Russian aluminium from its warehouse network. The LME responded, assuring that they would continue to reflect all relevant government sanctions and tariffs, but were not ready to revoke their decision made in November of 2022. At that time, however, the proportion of Russian aluminium in LME warehouses stood at 17.7% and had been relatively stable compared to preceding months. Looking at the exponential increase since, and the risk that even more Russian aluminium will be delivered to the LME warehouses, this does warrant the LME to reconsider their stance.

The LME also emphasized that their priority during challenging geopolitical situations is to maintain an orderly market and provide a reliable price reflective of global market conditions. This, however, is a tricky feat as some analysts estimate Russian metal to carry a discount of $100-300 per metric ton compared to material sourced elsewhere.

What is to come

The war between Russia and Ukraine entered a new phase this summer when Kyiv initiated its counteroffensive. Nonetheless, defense experts deem it unlikely that the counteroffensive will yield breakthroughs this year, indicating a likely prolonged conflict well into 2025 or beyond. Meanwhile, prospects for peace talks between Russia and Ukraine remain slim, despite efforts to bring both parties to the negotiation table.

Maintaining the economic pressure created by sanctions on Russia is therefore crucial. It is also imperative to send clear signals by making it more difficult for Russia to maintain its international trade relationships and fund the war. Steps towards banning aluminium similar to other import bans have already been made. In February, the US imposed 200% duties on imports of Russian-made aluminum products. In March, Canada banned imports of Russian aluminum and steel. In May, the UK also revealed plans to ban imports of Russian aluminum along with diamonds, copper, and nickel.

Since Hydro’s letter to the London Metal Exchange in July, there have been several reactions by aluminium market players, who claimed banning Russian aluminium would lead to a market destabilization. We are of the opinion that there is ample aluminium available in the market place. And this is in a situation where more than 50% of European aluminum capacity is curtailed, a direct consequence of the higher energy prices, following Russians unprovoked invasion of Ukraine. While in Russia, aluminum production has not declined, and the metal is being exported to Europe, directly and indirectly.

In mid-August, Hydro and the London Metal Exchange had the opportunity to sit down together and discuss the matter directly, where we could elaborate on our concerns, for their further consideration.

In summary, we strongly believe the EU and any other country, especially the G19 countries, should sanction import of Russian metal:

• ·EU has put sanctions on many other raw materials (such as oil, gold, steel, coal) that are sold from Russia, contributing to the prolonging of the war in Ukraine. There are no good reasons for aluminium to be kept off this list.
• Around 50 percent of EU aluminium smelters have closed or curtailed due to the high energy prices resulting from the Russian war against Ukraine while Russian companies are benefitting.
• Value of Russian aluminium export is USD 4.4 billion in 2021, increased to USD 4.9 billion in 2022. This aluminium export to EU helps financing the Russian war machine at the expense of European industry.
• We fail to see any significant negative impact on EU downstream industries in case such import ban is imposed. Globally there is more than sufficient aluminium available.?