US and UK sanctions on Russian metals will cement China as Moscow’s buyer of last resort for key commodities, and enhance Shanghai’s role as a venue to set prices for materials crucial to the global economy.
The London Metal Exchange’s ban on newly produced Russian aluminum, copper and nickel is likely to drive Chinese imports even higher. It also leaves the Shanghai Futures Exchange as the only major commodities bourse in the world to accept Russian shipments of the three metals.
“The liquidity of Russian metals in European and American markets may further decline, and global trade flows will also be reshaped,” said Wang Rong, a senior analyst at Shanghai-based broker Guotai Junan Futures Co.
Energy market sanctions imposed on Moscow in the wake of its invasion of Ukraine have already had a dramatic impact on China’s buying habits. Russia leaped above Saudi Arabia to become the biggest source of Chinese crude oil imports last year. It’s also now No. 2 for coal and is likely to become Beijing’s biggest supplier of natural gas this year.
Even without formal sanctions, China’s imports of Russian aluminum have hit record levels. Russian aluminum giant United Co. Rusal International PJSC generated 23% of its revenue from China last year, compared with just 8% in 2022. Rusal has also taken a 30% stake in a Chinese alumina plant to plug a gap in supplies of the key ingredient amid disruptions triggered by the war in Ukraine.
The new sanctions will push more exports of Russian metal to countries outside US and UK jurisdictions, especially China, according to Guotai Junan. The extra supply will also encourage the export of metals produced in China as more material pools within its borders, the broker said in a note. China is the world’s biggest producer of refined copper and aluminum and a major player in nickel via investments in Indonesia.
Chinese importers have taken advantage of Beijing’s strategic alliance with Moscow to win discounts on key raw materials, paying in yuan to bypass the dollar, the currency in which trades are usually settled. That helped the world’s biggest commodities buyer stave off the inflationary impact of the war in Ukraine, as well as advancing Beijing’s desire to unseat the greenback as the world’s reserve currency.
But more Russian shipments becoming available at a time when China’s economy is so sluggish presents its own problems. Chinese metals traders struggled last year with weak demand and the green shoots of recovery in markets for items like copper are relatively recent.
The prospect of additional Russian supplies widened the spread between London and Shanghai metals in early trade on Monday. While LME aluminum spiked as much as 9.4%, the reaction on SHFE was more muted, with the rise in price capped at 2.9% compared with Friday’s close.
China has long sought greater pricing power over global commodities given its hefty reliance on imports. How that plays out for the Shanghai exchange is complicated by the new sanctions rules, which will allow old Russian metal to continue to be delivered to the LME, the world’s benchmark, as well as to the Chicago Mercantile Exchange, the premier exchange in the US.