Nonferrous metals give back gains as Russia sanctions less severe than expected

Key nonferrous metals largely gave back the previous day's gains in London trading early Feb. 25, as market sources considered the sanctions to be imposed on Russia following its invasion of Ukraine less severe than expected.

The sanctions announced by the US, European Union and the UK are seen unlikely to have any major impact on metals flows from Russia although they could impact the financing of Russian metals and steel trade.

Russia is a major producer of metals including aluminum and nickel and is also a substantial copper producer. Sanctions on individual Russian metals or steel companies or their owners could have potentially tightened international metals supplies, as happened in 2018-2019 when the US exercised sanctions on Russia's Rusal, one of the world's biggest primary aluminum producers.

London Metal Exchange three-months spot nickel traded at $24,185/mt at 1120 GMT Feb. 25, against the closing price of $24,716/mt on Feb. 24.

LME three-months spot copper traded at $9,830.50/mt ($4.46/lb) at 1120 GMT Feb. 25, against the closing price of $9,864/mt on Feb. 24.

LME three-months spot aluminum traded at $3,317/mt at 1120 GMT Feb. 25, against the closing price of $3,394.50/mt on Feb. 24.

Early on Feb. 24, hours after news broke of the invasion, the metals' spot trade prices had gained more than 5% in some cases over the previous day's close, pushing aluminum to an all-time high of around $3,450/mt. Some of the gains diminished during the day's trade.

"The aluminum and the nickel price have both dropped by as much as 2% this morning," said Commerzbank's commodities analyst Daniel Briesemann in a Feb. 25 note. "This is because the US sanctions imposed on Russia yesterday evening do not affect the aluminum industry (and probably won't hit the nickel industry, either). However, we do not believe the risk of supply outages has been averted, as Russia itself could decide to restrict its commodities exports in retaliation."

Briesemann noted that any supply outages could coincide with low inventories. "At only just over 820,000 tons, aluminum stocks in the LME's warehouses are close to a 15-year low. Nickel stocks amount to only around 81,000 tons, which is likewise a very low level by historical standards. Freely available stocks of both metals are even significantly lower."

ED&F Man Capital Markets analyst Edward Meir noted Feb. 24, after some sanctions were announced, that "Westerns sanctions left Russian energy sales untouched and the same applied to aluminum and nickel exports and so Rusal and Norilsk are off the hook for now. Having said that, we suspect that dealing in Russian metal will turn out to be very difficult given increasingly onerous banking, insurance and shipping restrictions."

Commodities 'deflate'

"After investors had a chance to digest the sanction announcement and the accompanying carve-outs, we saw a stunning reversal in the two major asset classes; commodities began to deflate, while US equities started to recover, ultimately ending sharply higher on the day, with gains of between 1%-3%," Meir continued. "Base metals ended mixed; copper, nickel and lead actually lost ground, while aluminum and zinc finished up by roughly 2% and 1% respectively, although both were well off earlier highs. Lead and copper did not do much, finishing pretty much flat on the day."

Gold falls

The gold spot price, as of Feb. 25 1120 GMT, stood at around $1,908/oz, after reaching $1,954/oz early Feb. 24, its highest level in over a year, as investors sought "safe haven" assets.

"The fall from gold's 17-month high was a potential result from weaker-than-expected sanctions on Russia, with Biden refusing to exclude the country from the Swift payment mechanism," said John Meyer, analyst with broker SP Angel, Feb. 25.