A possible ban on Russian supplies by the London Metal Exchange (LME) would be a seismic event for the metals industry, cutting some of the world's biggest companies off from the main global marketplace.
The exchange has yet to make a decision, but on Thursday (Oct 6) launched a formal three-week discussion process on the possibility of banning Russian metal, potentially as soon as next month.
In practice, a ban would simply mean that metals from Russia - which accounts for about 9 per cent of global nickel production, 5 per cent of aluminium and 4 per cent of copper - could no longer be delivered into any warehouse around the world in the LME network, which stores metals used to deliver against futures contracts when they expire.
But the debate, and potential fallout, provide a stark case study of how deeply the LME is intertwined with all corners of the physical metals industry. Despite being a private company owned by Hong Kong Exchanges & Clearing, the exchange's decisions have far-reaching consequences for the way in which metals are priced and traded globally.
To be clear, the vast majority of global metal is sold from producers to traders and consumers without ever seeing the inside of an LME warehouse. And big producers, including top Russian groups United Company Rusal International and MMC Norilsk Nickel, almost never sell their metal directly on the LME.
But the exchange nonetheless plays several vital roles.
First, it's a market of last resort for the physical metals industry: stocks of metal in the global network of LME warehouses can be drawn down in moments of shortage, and in times of glut excess inventories can be delivered to the LME.
In recent months, traders have been bracing for a glut, particularly in aluminium, amid concerns about the state of the global economy. As some buyers shun Russian metal, traders had expected that aluminium from Rusal would be among the first to be delivered to the LME - with some expecting hundreds of thousands of tons of inflows. Rusal has denied it is planning to deliver "large quantities" of its metal to the exchange.
Should the LME go ahead and ban new deliveries of Russian aluminium, that would remove the potential overhang of stock. When Bloomberg first reported on the LME's plans for a discussion paper, aluminium prices jumped as much as 8.5 per cent - the biggest intraday rise on record - as traders who had been anticipating an inflow of Russian metal rushed to reverse their short bets. As of Friday, prices were up about 10 per cent from last week's 19-month low.
Of course, the LME is considering this drastic step because it's worried about a similarly disruptive possibility if it doesn't take action: that Russian metal that many consumers refuse to touch will flood onto the exchange and cause its prices to stop being useful as global benchmarks.
In fact, one of the reasons it is considering a quick rollout of any possible ban is that a decision to proceed could prompt a rush by holders of Russian metal to deliver it on the exchange before the restrictions came into place.
Any move by the LME would also have ramifications beyond the warehouse flows. For example, some contracts between producers, traders and consumers stipulate that the metal should be "LME deliverable", meaning that a ban by the LME could lead to contracts being broken.
Banks often insist that the metal they finance should be LME deliverable, because they want to be sure that, in the event of any problems, it could be sold easily on the exchange. And many traders rely on the fact that metal can be delivered to the LME when they use LME contracts to hedge their physical inventories - should they choose to, they can close the hedge by simply delivering metal.
As a result, any move by the LME could create headaches for Rusal and Nornickel, as well as their biggest customers. Glencore in particular has a vast multi-year contract to buy commodity-grade aluminium from Rusal.
There's already an expectation at the companies that the consultation process launched by the LME will make it more difficult for customers of Rusal and Nornickel to fund working capital using the metal as collateral, according to people familiar with the matter.
The simple fact of the discussion is likely to cause Nornickel's sales to Europe to drop significantly, given that it creates uncertainty at a crucial time of the year for sales negotiations, one of the people said.
That means that a ban by the LME could lead to the Russian companies being forced to accept lower prices.
Nornickel already was weighing options to redirect some sales to the east if sanctions against Russia didn't allow it to maintain its current sales structure, chief executive officer Vladimir Potanin said in an interview with RBC TV in September.
"At the end of the day, this won't change supply-demand balances, but it does mean we'll have metal looking for a home," said Colin Hamilton, managing director for commodities research at BMO Capital Markets. "Someone somewhere will buy that metal at a discount." BLOOMBERG