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A possible ban on Russian supplies by the London Metal Exchange would be a seismic event for the metals industry, cutting off some of the world’s largest companies from the main global market.

The exchange has not made a decision yet, but on Thursday it launched a three-week formal discussion process about the possibility of banning Russian minerals, likely as soon as next month.

In practical terms, the ban could simply mean that the metal from Russia – which accounts for about 9% of global nickel production, 5% aluminum and 4% copper – can no longer be delivered to any warehouses around the world in the LME network, which stores Metals used to be delivered against futures contracts upon expiration.

Read: LME begins discussion of possible ban on new Russian minerals

But the controversy, and the potential ramifications, provide a stark case study of how much LME is intertwined with all corners of the physical metals industry. Although it is a privately owned company of Hong Kong Exchanges & Clearing Ltd. However, stock exchange decisions have far-reaching consequences for the way the metal is priced and traded globally.

To be clear, the vast majority of global metals are sold from producers to traders and consumers without seeing what’s inside the LME depot. And major producers, including the largest Russian United Groups, Rusal International SAOG and MMC Norilsk Nickel SAOG, never sell their metals directly on the London Metal Exchange.

But exchange nevertheless plays several vital roles.

First, it is the market of last resort for the physical metals industry: metal stocks can be withdrawn in the global network of LME warehouses in moments of shortage, and in times of glut, surplus stocks can be delivered to the LME.

The story continues

In recent months, traders have been bracing for a glut, especially in aluminum, amid concerns about the state of the global economy. With some buyers shying away from the Russian metal, traders expected aluminum from Rusal to be among the first to be delivered to the London Metal Exchange – and some expected inflows of hundreds of thousands of tons. Rusal denied that it plans to deliver “large quantities” of its metal to the exchange.

Read: Rusal says it has no plans for ‘big’ deliveries to the LME

Should LME continue and block new deliveries of Russian aluminum, this would remove potential overstocks. When Bloomberg first reported the LME’s plans for a discussion paper last week, aluminum prices jumped 8.5% – the biggest intraday rally ever – as traders who had been anticipating the influx of the Russian metal quickly reversed their short bets. As of Friday, prices are up about 10% from last week’s 19-month low.

Of course, the LME is considering this drastic move because it worries about a similar sabotage potential if it doesn’t take action: that the Russian metal that many consumers refuse to touch will flood the exchange and cause its prices to cease to be global. Standards.

In fact, one of the reasons it is considering a quick rollout of any potential ban is that a follow-up decision could prompt holders of Russian metals to hand them over on the exchange before the restrictions are imposed.

LME Delivery

Any move by the LME would also have repercussions beyond warehouse flows. For example, some contracts between producers, dealers and consumers state that the metal must be “LME deliverable,” meaning that a ban imposed by the London Metal Exchange could lead to contract breaks.

Banks often insist that the metal they finance must be deliverable on the London Metal Exchange, because they want to ensure that if any problems arise, it can be easily sold on the exchange. Many traders rely on the fact that the metal can be delivered to the LME when they use LME contracts to hedge their physical stocks – if they so choose, they can close out the hedge by simply handing over the metal.

As a result, any move by the LME could cause headaches for Rusal and Nornickel, as well as their biggest clients. Glencore Plc in particular has an extensive multi-year contract to purchase commodity grade aluminum from Rusal.

Read: It’s “mating season” in minerals and Russia is freezing

There is already an expectation in companies that the advisory process launched by the London Metal Exchange will make it difficult for Rusal and Nornickel clients to fund working capital using the metal as collateral, according to people familiar with the matter.

The simple fact of the debate is likely to cause Nornickel’s sales to Europe to plummet, given that it creates uncertainty at a crucial time of the year for sales negotiations, one person said.

This means that the ban on the London Metal Exchange could force Russian companies to accept lower prices.

CEO Vladimir Potanin said in an interview with RBC TV in September that Nornickel was already considering options to redirect some sales to the east if sanctions against Russia did not allow it to maintain its current sales structure.

“At the end of the day, this is not going to change the supply and demand balances, but it does mean we will have miners looking for a home,” said Colin Hamilton, managing director of commodity research at BMO Capital Markets. “Someone somewhere is going to buy this metal at a discount.”

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