Aluminum producers such as Alcoa and Norsk Hydro have long complained that stockpiles of Russian aluminum in London Metal Exchange warehouses could negatively affect the price benchmark.
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Aluminum producers in the US and Europe have suggested that stockpiles of Russian aluminum in London Metal Exchange warehouses are distorting global aluminum prices and that the disconnect is poised to get worse as the metal stock grows. However, analysts told S&P Global Commodity Insights that those concerns are unfounded and potentially self-serving.
Russia's invasion of Ukraine in February 2022 made the country's vast aluminum smelters anathema to several buyers in Canada, Europe and the US. Producers outside of Russia began to expect a price premium based on shrunken supply, but that has not yet materialized amid slumping global demand and a willingness of buyers in China, Latin America and Turkey to purchase Russian aluminum.
The aluminum stockpiled in warehouses owned by the London Metal Exchange (LME) is disproportionately Russian, but the overall stocks are low.
US-based producers Alcoa Corp. and Century Aluminum Co. and Norway-based Norsk Hydro ASA said the increasing lack of non-Russian metal could cause the LME price to disconnect from the physical market. Analysts said such fears are exaggerated since a good portion of the world continues to buy Russian aluminum.
"Outside the US, who has posted hefty duties on Russia aluminum, the other regions of the world continue to move Russian aluminum. That's a fact. You can see it in trade statistics," Jorge Vazquez, managing director of consulting firm Harbor Aluminum, told Commodity Insights. "So, it is understandable to hear producers wanting to ban a fellow competitor from the market, as they would definitely benefit."
Aluminum producers fret
The LME began releasing data in January on the country origin of products held within its warehouses. Since then, stockpiles of Russian aluminum have increased 143% to 227,525 metric tons, or about 80% of total stock in July. Some large producers want guarantees from the LME that the aluminum will not be sold.
Alcoa executives said additional Russian aluminum will be dumped onto the global market, and the growing inventory would send prices into freefall.
With large stockpiles made up of metal "unwanted by much of the world, it is difficult to have confidence that the LME exchange price matches the true physical price for non-Russian aluminum that customers largely require," President and CEO Roy Harvey said during the call.
In Europe, imports are down 25% on an annualized basis as Russian aluminum "continues to be disfavored by the largest global markets" with the exception of China,
"The large import buildup in certain Asian markets, primarily China, that could eventually end up being delivered into LME warehouses" could make the problem worse, Aboud added.
"We see a risk that the market, supported by LME, is becoming more and more uneven," a spokesperson from Norsk Hydro told Commodity Insights.
The company is calling for the LME to delist Russian product.
The LME told Commodity Insights that Russian metals are being consumed by "a broad section of the market, and we will remain vigilant in respect of this matter."
Shifting trade flows
Analysts said that while much of the aluminum in LME warehouses is Russian, there is not much total metal. LME aluminum stocks are at 520,000 metric tons, a far cry from the 5.49 million metric tons stored in 2014, according to the Federation of Aluminium Consumers in Europe (FACE), a trade association.
"Current LME stocks are actually low compared to recent historical levels," Uday Patel, senior research manager of global aluminum markets at Wood Mackenzie, told Commodity Insights.
The LME cash price for aluminum was $2,162.80 per metric ton Aug. 30, a drop of 44.2% from the peak of $3,877.50/t on March 4, 2022, data from S&P Global Market Intelligence shows.
And Russian aluminum is moving globally, suggesting that the global price reflects the true price.
"Latin America continues to buy Russian aluminum. Europe continues to buy Russian aluminum. India continues to buy, Asia continues to buy. China continues to buy," Harbor Aluminum's Vazquez said.
Russia remained the largest supplier of primary aluminum for China in July as exports to the world's second-largest economy increased 27.7% month over month to 108,002 metric tons, accounting for 92.7% of the country's total, according to China's customs data.
Prices and premiums for aluminum in US warehouses would be higher if buyers had a preference for non-Russian aluminum, since the LME suspended the inflow of Russian metal into US warehouses in late February after the US added tariffs.
"There is basically no difference in the trend that prices have shown in countries like the US, where no Russian aluminum is purchased, versus countries where Russian aluminum is purchased," Vazquez said.
FACE seconded the notion that Russian stockpiles are normal.
Russian aluminum giant Rusal is the largest provider of liquidity on the LME, meaning it typically sets prices for other buyers and sellers as part of its own trades, Mario Conserva, FACE's secretary general, told Commodity Insights.
"This makes attempts by some market players to call for restrictions on Russian metal even more appalling and destructive," Conserva said.
Premiums come with demand
Some analysts expect a gap between the prices of Russian and non-Russian aluminum to occur if demand returns.
"If demand/restocking picks up, then buyers could be left scrambling for non-Russian metal from LME sheds, which would add to price volatility," Patel said.
However, Wood Mackenzie expects a small deficit in the aluminum market in 2023 and 2024 "with an uninspiring price trajectory," Patel added.
"When demand returns, then it will become more of an issue with premiums likely to increase and non-Russian metal likely to be concentrated in a few hands," said Alastair Munro, a senior base metals strategist at brokerage Marex.
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