Aluminum, nickel lead metals rally as market seeks clarity on SWIFT rules for Russia

Aluminum and nickel continued to lead the metals price rally March 1 -- after monthly average gains of around 7% in February -- as market players sought clarity on how some Russian banks' exclusion from the SWIFT international payments system might impact supplies.

Russia is a major exporter of both metals.

London Metal Exchange three-month spot aluminum traded at $3,461/mt at 12:58 London time March 1, up 2.8% on the previous day's close; with three-month spot nickel up 2.3% at $24,780/mt.

Aluminum had touched a record $3,525/mt Feb. 28, when nickel broke above $25,000/mt.

Amid a barrage of sanctions imposed by the US, EU, UK and other Western allies on Russian entities following the country's Feb. 24 invasion of Ukraine, it was still unclear whether SWIFT-related sanctions would be applicable to all metals trades. The US Treasury announced Feb. 28 exemption of energy trades from these sanctions until June 24, in a move to lessen energy price inflation.

Market appraisals of the situation varied.

"Although a few Russian banks have been disconnected from the SWIFT system we expect payments to the main metal producers to continue without disruption," an international trading house told S&P Global Commodity Insights. "This will be via the remaining Russian banks or through the international branches of Russian banks. In addition, the large metal producers such as Rusal, Norilsk Nickel etc. have offshore treasury systems in place."

Another diversified trading house said Russian banks' removal from SWIFT "cuts off access to funding and access to liquidity -- it will be very difficult to operate."

Major trader Glencore declined to comment.

A Sberbank spokesperson "was not prepared to comment on any sanctions." Shares in Russia's largest bank nosedived in London trading Feb. 28.

The UK's Financial Conduct Authority March 1 temporarily suspended trading in securities of JSC VTB, an Indian subsidiary of Russia's second-largest bank, VTB. Trades in another of the bank's subsidiaries were suspended on the London Stock Exchange Feb. 25.

UBS -- which raised its forecast aluminum target price to $3,500/mt (from $3,300/mt) and nickel to $26,000/mt (from $24,000/mt) -- noted that Russia's invasion of Ukraine had exacerbated the inverse relationship between commodities, including metals, and equities.

"Commodity markets have moved in the opposite direction of global equities so far this year. The rise in commodity prices has been broad-based and not limited to just the energy sector, which has received the most market attention," the bank's analysts said in a report distributed March 1.

Aluminum upside

A Swiss-based trader said the potential impact of cancelling SWIFT payments for aluminum could "compound the difficulties of moving material out of Russia, [so] there will be more upside on the Rotterdam premium -- but I don't think it's being priced in yet."

Sanctions, it is feared, could further squeeze aluminum inventories. These are tight following China's recent curbs on the use of coal-based energy at smelters, which has led to a decline in global primary output levels on an annual comparison over the past three months, despite rising demand, according to the International Aluminium Institute.

"Around 5%‑6% of global aluminium and nickel supply is at risk from the Russia‑Ukraine conflict via potential sanctions on Russia," wrote CBA analysts in a March 1 report. "Aluminium markets were already tight before the conflict due to supply cuts in China as policymakers looked to contain emissions. Prices were also supported by higher energy‑led production costs in Europe. While sanctions are unlikely to be applied directly to Russian aluminium exports, sanctions on individuals close to Putin could indirectly impact Russia's aluminium output."

Announcement of 2018 sanctions against Russian billionaire Oleg Deripaska, which resulted in restrictions on Russia's Rusal -- the world's second largest aluminum producer -- led prices for the metal to initially spike around 30%, CBA recalled.

European Aluminium, a Belgium-based industry association, said it was analyzing the new sanctions and how they would impact the European aluminum value chain.

"Russia represents between 15% to 20% of the EU annual metal imports. Thanks to a strong domestic production and recycling infrastructure, and a diversified global supply network, European Aluminium's members are well positioned to meet Europe's demand for our metal," a spokesperson said. "Nonetheless, the current and other recent crises have demonstrated one thing: from energy to raw materials, the EU cannot build its economic and sustainability ambitions on import dependencies. We call on EU policymakers to intensify their efforts in establishing a robust industrial strategy that combines the EU's 2050 sustainability leadership objectives with coherent trade defense and strategic autonomy policy tools."

The EU typically imports around 1 million mt/year of aluminum from Russia, mainly primary aluminum products.

In other developments, the London Metal Exchange said it would act to ensure no breach of sanctions in LME metal trading. Neither the LME nor LME Clear have any Russian entities as members, it said in a note to the market. An aluminum alloy brand, URV, produced by TPK Urksplav Ltd. in Ukraine's non-government-controlled east, is currently suspended and there is no stock on LME warrant.

Nickel stocks falling

ING Economics pointed to reports that nickel flows from Russia had been mildly disrupted Feb. 28, as some shippers refused to move Russian metals. Russia's Norilsk Nickel is a major supplier.

"Nickel markets were nonetheless in a better position than aluminum before the conflict in that rising supply from Indonesia was largely expected to see surplus conditions return," said CBA analysts.

"Where deficit conditions are a concern are Class 1 nickel markets (i.e. high purity nickel that is suitable for the battery market), especially with LME nickel stockpiles falling since last April. Russia has an outsized impact on Class 1 nickel markets, accounting for about 17% of Class 1 nickel production. Sanctions on nickel also look unlikely at this stage."