One week after catching wind of the scheme, the London Metal Exchange (LME) has announced new plans to close loopholes that allow traders and warehouse operators to game the latest series of sanctions on Russian metals.
As reported last week, with the ink on the new sanctions barely dry, UK traders immediately began making deals with LME-approved warehouses to profit off the massive stocks of Russian metal that were already in storage and sanction-free (type 1 under the rules) by ‘withdrawing’ them on paper, then resubmitting them as sanctioned (type 2) metals, whereupon they made deals with the warehouses to split the profits on the indefinite rent these now-untradeable metals would accrue.
Bloomberg reporters called it “the latest episode in a rich history of traders seeking to exploit loopholes to profit from giant stocks of aluminum on the LME, which can generate hundreds of millions of dollars a year in storage and handling fees.”
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Now, the LME has updated its regulations in an attempt to close the loopholes that make the scheme legal and profitable.
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In another section, the LME tersely addressed the misuse of the profit-splitting rent agreements themselves.
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Barring further ingenuity by LME traders, the updated rules should eliminate the scheme and allow the type 1 metals stocks already in approved warehouses to act as a supply buffer for the Western markets, as intended.
Still, even if they are enforced to the letter, the sanctions may not succeed in starving the Russian war effort. According to a recent report from ING, the end result of the new sanctions regime will be an even greater share of Russian metal flowing to sanction-neutral countries, at ever-lower prices.
“The LME is a market of last resort for the physical metals industry,” the ING report noted. “Although most metals traded globally are never delivered to an LME warehouse, some contracts stipulate that the metal should be LME deliverable. This means that Russian companies will be forced to accept lower prices. Russia-origin metals will trade at even wider discounts and continue to flow to sanction-neutral countries, like China, the world’s biggest aluminium consumer.”
The bank said that China “is likely to continue to buy discounted Russian material to use domestically” while exporting their own domestically-produced and unsanctioned aluminum to Europe and the U.S. to fill the supply gap, effectively buying low and selling high.