Flood Of Russian Aluminum Undermines Accuracy Of LME Prices

MetalMiner actively posts on a variety of metals and market developments. However, we prefer to discuss topics that our clients bring to us, especially those that keep buyers awake at night. One such topic that has been recurring over recent months is the anxiety surrounding the LME Aluminum quotation. Specifically, there has been a lot of talk over the LME`s potential failure to reflect the true value of global aluminum prices. Although it may be an oversimplified statement, it is essential to note that there is no single global aluminum price. Instead, every market in the world has primary aluminum prices. That said, the London Metal Exchange quotations broadly influence these prices, factoring in premiums and discounts to account for local costs, taxes, and supply/demand pressures.

The primary concern keeping buyers up at night is the supply/demand position. Specifically, the worry stems from the oversupply of Russian aluminum and the limited supply of non-Russian metal on the exchange. This situation could potentially lead to an excess of the exchange`s metal coming from a supply source that too few buyers are willing to use. This, in turn, could cause the LME price to trade at a discount to its actual value. Last month, we reported wild swings in the Contango/Backwardation on the LME. This mainly stemmed from traders competing for parcels of non-Russian brands. However, the scarcity of non-Russian metal has far-reaching consequences beyond the exchange itself.

According to Reuters, Russian brands accounted for approximately 80% of the warranted aluminum stocks on the LME by the end of June. Moreover, the situation has likely worsened since then. Asian warehouses store a significant portion of this metal, as China has been the largest consumer of Russian metal, both directly and from the LME. Nevertheless, Reuters observed that China`s appetite for Russian primary metal seems to be weakening. Last year, the trade between Russia and China was robust, with China exporting Alumina to Russia and receiving primary ingots in return.

This trade was advantageous for China, especially during a drought in Yunnan that curtailed its smelting capacity. Indeed, Chinese imports of Russian-brand primary aluminum increased from 291,000 metric tons in 2021 to 462,000 metric tons last year. The pace of imports accelerated further during the first half of this year, with Russian metal imports surging by 177% year-on-year to 414,000 metric tons. At the time, Russian aluminum accounted for 85% of Chinese imports.