The London Metal Exchange has outlined plans to clamp down on trading methods used by traders such as Trafigura and Glencore to circumvent sanctions on Russian metals.
The commodities giants were reported to be ordering large volumes of so-called ‘Type one’ aluminium, which UK citizens and companies can freely trade, and re-delivering it as a ‘Type 2’ metal, which is restricted by the sanctions.
As the sanctioned metal cannot be traded, it would be left sitting in warehouses and companies can then pursue a share of the rent on those buildings from future owners of the metals.
According to Bloomberg, nearly $400m (£321m) of aluminium was requested for withdrawal from warehouses in South Korea and Malaysia last week, driving LME inventories downwards to near-record lows.
As Reuters columnist Andy Home recently penned, “The UK and U.S. governments were hoping that by allowing older Russian metal to continue trading, they would avoid a drain on stocks and any resulting price turbulence.
“They didn’t allow for the fact that after years of gaming the LME’s labyrinthine rules around load-out queues, both aluminium traders and warehouse operators are primed to spot any regulatory gap, however narrow.”
The London Metal Exchange’s new rules will, in theory, increase oversight of these practices and the body could even block applications to re-deliver the metals.
And in cases where the traders have re-delivered the metal without it leaving a warehouse, the LME can automatically convert it back to Type one metals, allowing it to be traded free of sanctions.
These sorts of so-called ‘warehouse games’ have been commonplace in the metal trading ecosystem for years.
Russia remains the largest source of metals for the LME, accounting for 90 per cent of aluminium inventories, 62 per cent of copper, 36 per cent of nickel and 40 per cent of all metals, according to LME figures.
The LME has been contacted for comment.