Traders, brokers and clerks on the trading floor of the open outcry pit at the London Metal Exchange.

(April 15): Aluminium surged by a record on the London Metal Exchange (LME) as traders responded to new US and UK sanctions that banned deliveries of Russian supplies produced after midnight on Friday.

The restrictions on key industrial metals — aimed at curbing President Vladimir Putin’s ability to fund his war machine — are unlikely to stop Russian sales but inject significant uncertainty into commodities markets that have already been reshaped in the aftermath of Russia’s invasion of Ukraine.

Aluminium jumped as much as 9.4%, the most since the current form of the contract was launched in 1987, while nickel rose as much as 8.8%, suggesting brokers are bracing for major supply chain disruption. Copper, more liquid and driven by the global economy over recent weeks, was more subdued.

The immediate price action was fuelled by “worries that the sanctions will reduce Russian flows to Western markets,” said Jia Zheng, head of trading and research at Shanghai Dongwu Jiuying Investment Management Co. “Any stimulation will be amplified amid an existing bullish backdrop.”

Aluminium jumped as much as 9.4%, the most since the current form of the contract was launched in 1987, while nickel rose as much as 8.8%, suggesting brokers are bracing for major supply chain disruption.

Russia is an important metals producer, accounting for 6% of global nickel supply, 5% of aluminium and 4% of copper. The fresh restrictions bar new Russian supplies of all three to the LME — where global benchmark prices are set — as well as to the Chicago Mercantile Exchange. The metals had until now escaped the kind of direct curbs that have shaken up supply chains from natural gas to crude oil and coal.

The timing of the sanctions, just ahead of the global copper industry’s annual CESCO Week gathering in Chile, has made for lively conversations in business class cabins and passport queues as the industry descends on Santiago. In London, the home of the LME, many traders were glued to their screens late on Sunday night.

Metals traders are hardened to wild swings and long weekends after a period marked by a nickel short squeeze that almost destroyed the LME in March 2022, and sanctions on United Co Rusal International PJSC that caused havoc in 2018.

Some traders and executives argued that new restrictions are ultimately unlikely to have as dramatic an impact as those two events. Russia’s two metal giants, Rusal and MMC Norilsk Nickel PJSC, are much less entangled in the Western financial system than they were before the war, and the industry has spent the past two years preparing for the prospect of sanctions.

“The measures are not meaningfully targeting physical trade of units outside the LME warehouse system, which should moderate the scale of the price impact,” Citigroup Inc analysts wrote in an emailed note.

The escalation of hostilities in the Middle East could also stoke volatility across metals, which have advanced this year on expectations for the US Federal Reserve to cut interest rates, and on signs of a recovery in global manufacturing. Aluminium’s surge on Monday carried the metal to its highest since June 2022.

“Price-wise, the natural predilection will be higher,” said Alastair Munro, a broker at Marex Group based in London. “But against that, it will be interesting to see if any funds or traders have to reduce positioning because of the increasing volatility.”

Aluminum was up 4.9% at US$2,616.50 a tonne by 1.35pm Shanghai time, while nickel was 3.9% higher.

Most observers agree on one likely outcome of the curbs: more Russian material flowing to China. Rusal got almost a quarter of its revenues from the Asian nation last year, up from 8% a year earlier, while sales to the Europe and US declined. Rusal’s shares in Hong Kong fell nearly 6% on Monday.

Still, there are also concerns over the prospect of a flood of old Russian metal — which is still permitted — getting dumped onto the LME. The LME on Saturday confirmed that Russian metal produced before April 13 can continue to be delivered, though the exchange said it would require evidence that the metal was not in breach of sanctions and would approve deliveries on a case-by-case basis. That’s fuelling concerns that the LME’s prices become the price of old Russian metal.

Russian metal already accounted for 91% of LME aluminium stockpiles at the end of March, 62% of copper and 36% of nickel. Traders are now expecting a wave of deliveries of Russian material that was being held outside the LME system, which could now be dumped onto the exchange as its owners worry about the prospect of future restrictions.

In the aluminium market, estimates of the amount of Russian metal being held outside of the LME system range from a couple of hundred thousand tonnes to as much as one million tonnes.

In its notice on Saturday, the LME acknowledged the possibility that the uncertainty caused by the sanctions means “a relatively large supply” of Russian metal could flood onto the exchange.