There is growing enthusiasm for the new rules, combined with some details of the LME contract and storage system, which have created an opportunity for complex but profitable trading.
After the UK and US banned sales of Russian aluminum, copper, and nickel on the London Metals Exchange (LME), it took less than a day for traders to spot a way to make money by following the new rules.
The opportunity lies in the huge stocks of Russian metal already present in the exchange’s global network of warehouses.
Russian material produced after April 12 cannot be delivered to the LME. The goal is to drive down demand and prices for Russian supplies, but mines can still sell to non-U.S. and non-British buyers outside the LME, where most of the world’s metals trade takes place. Prices initially shot higher, but quickly fell back, indicating that markets do not expect major disruptions.
In the world of metals, there is growing excitement about the new rules, combined with some structural details of the LME contract and the global storage system, which have created an opportunity for a complex but profitable trade.
The sanctions, and the way the LME has chosen to implement them, have created a new multinational market of metal categories, each with different restrictions. While the exchange can no longer accept “new” Russian supplies, the UK actually relaxed previous rules to allow British buyers to accept Russian metal already in the LME system at the time of the rules announcement.
This category of metal — called “Type 1” by the LME — is what many are focusing on now. The growing share of Russian inventories in LME warehouses has been controversial since the invasion of Ukraine and the share has risen further in recent months, above 90% for aluminum, after British buyers were barred from withdrawing Russian metal in December, making supplies even less attractive to others.
But British citizens and companies can only accept Russian supplies already in the LME system before April 13; the permit does not extend to any metal registered after that date, or "Type 2".
Once Type 1 metal leaves the system, it loses its special status. If it is registered again, it becomes Type 2 and suffers the same restrictions.
Traders are now looking to withdraw large volumes of Russian metal (Type 1) already stored at the LME.
Subsequently, after reselling it (now as a Type 2) at the LME, they can make a deal with the warehouse to share the rent with future owners. For storage, fee-sharing agreements are a way to incentivize traders to deliver to their facilities, rather than those of competitors.
The operation is complex, but the idea is simple: basically, you’re betting that the metal could sit there for months if British citizens don’t pick it up and many Western industrial consumers don’t want it. In the past, the metal may have been attractive to buyers in China, but in the coming months that market could be saturated with newly made Russian-made metal.
And for every day that the metal remains there, the trader receives a part of the profit on storage.
If traders are right in thinking that no one will want to touch the metal, these deals could be very profitable for them but could prove problematic for the LME. Since the invasion of Ukraine, it has been criticized for avoiding blocking Russian deliveries unilaterally by arguing that consumers continued to show interest in the increasingly large volumes of Russian supplies delivered to the exchange.
Original article published on Money.it Italy 2024-04-26 06:42:00. Original title: Ecco come i trader di materie prime aggirano le sanzioni contro la Russia
