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Sanctions imposed on Russia by the European Union and the United States since the war in Ukraine began have not included Russian aluminum and other metals; rather they have been focused on financial, individual, travel, and oil and gas import or export. The EU and U.S. have actually increased aluminum imports since March of this year. Sanctions imposed in 2018 by then U.S. president Donald Trump on Russian aluminum were actually lifted one year later owing to disruptions in construction, automotive and power generation facilities.

The market

Aluminum futures are primarily traded on the London Metal Exchange and the physical aluminum can be stored in its 32 locations globally. The value of open interest for the aluminum futures market on the LME is more than seven times that of the next two exchanges – Shanghai Futures Exchange and Chicago’s COMEX – combined. (Open interest is the number of futures contracts held by market participants at end of the trading day.)

On Oct. 6, the LME published a discussion paper to solicit feedback on the continuing acceptability of Russian metal for delivery on the LME, following Russia’s invasion of Ukraine on Feb. 24. The discussion paper was prompted by a combination of market participants increasingly rejecting Russian metals in their 2023 plans, which led to projected increases in inventories of Russian metals at LME warehouses, ultimately affecting price and an orderly market.

The period for feedback was open for three weeks and closed on Oct. 28. The discussion paper laid out three potential paths forward and it received 41 formal responses (from traders, banks, producers and industry associations): maintain status quo (22 responses), prohibit new Russian metals (17), or use thresholds to manage inventory (2).

The LME also said it should not make or impose ethical judgments on the broader market; its responsibility is to ensure an ongoing and orderly market.

Based on the responses, on Nov. 11 the LME announced it will not ban Russian imports. The price of aluminum had risen 10 per cent since mid-October and has moved down about 1.8 per cent since Friday’s close. If the Russian metals are not removed as predicted and a build-up ensues, the price of aluminum is expected to drop.

Supply & demand

China accounts for nearly 60 per cent of global aluminum output. The biggest resources for bauxite, the raw material for aluminum, are located in Australia, China and Guinea. For local perspective, in 2020 Canada produced three million tonnes of aluminum worth US$11.5-billon; aluminum smelters are concentrated in the Saguenay–Lac-Saint-Jean region of Quebec.

Along with the discussion paper, there has been a significant bankruptcy in the space that will affect demand in the short term. In September, China Zhongwang Holdings filed a bankruptcy petition in its home province of Shenyang. Aluminum Insider cites a combination of China’s COVID slowdown along with excessive company debt left the firm with US$64-billion in liabilities but less than half of that amount in assets. Zhongwang was Asia’s largest manufacturer of aluminum extrusions for use in automotive, marine and rail as well as construction over the past decade.

There is continuing research in the use of other elements to create alloys of aluminum that could lead to increased demand longer term. An aluminum-scandium alloy developed by Rusal was recently approved for use in the shipbuilding industry in Russia. The new alloy is lighter and stronger than alternatives, which leads to fuel savings for commercial vessels. The current downside is metallic scandium is complex to prepare. Overall, aluminum-scandium alloys feature high strength, ductility, weldability, corrosion resistance with lower density. Combined, these features make the material ideal for aerospace and automotive manufacturing. Perhaps we’ll see lighter, stronger aircraft from this alloy or electric vehicles using an aluminum-scandium alloy to reduce car weight and extend range.

Summary

The LME has accepted the results of its discussion paper and is continuing to receive and warehouse Russian metals. It will be monitoring this closely as there are still a number of factors that could lead to market disruptions, including government sanctions and a buildup of Russian metals in LME warehouses.

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.