A $3 Billion Aluminum Stash That Is Now in Limbo After Sanctions

(Bloomberg) -- U.S. sanctions on United Co. Rusal have thrown an estimated $3 billion of aluminum into limbo.

Stockpiled metal produced by Rusal accounts for more than a third of the aluminum in warehouses monitored by the London Metal Exchange. While not explicitly subject to U.S. restrictions, it’s now a headache for the banks and traders who own it.

That likely includes Goldman Sachs Group Inc., JPMorgan Chase & Co., Glencore Plc, Trafigura Group, Castleton Commodities International LLC and Engelhart Commodities Trading Partners, who are among the top aluminum traders and inventory financiers. The companies declined to comment when contacted by Bloomberg.

“I don’t think there’s any doubt that it’s less valuable than other material,” said Oliver Nugent, a commodities strategist at ING Bank NV. “Consumers are concerned. Even taking old stuff that is pre-sanctions, they’re nervous.”

The issue for the metals industry is how to navigate a gray area of U.S. sanctions. There’s no legal restriction on buying metal produced and sold by Rusal before the sanctions, according to traders, bankers and lawyers. Even so, the products have become less desirable in the U.S. and Europe.

The LME has banned Rusal metal produced after April 6, when the sanctions were announced, from being delivered to settle futures contracts. But added that traders were “generally comfortable” dealing in metal produced and sold by Rusal before that date.

That hasn’t been the case for all aluminum buyers. Some told their suppliers they won’t accept delivery of any Rusal metal, regardless of when it was produced, according to executives at trading companies and metal users, who asked not to be identified.

Read more: Winners and Losers as Rusal Sanctions Spur Record Aluminum Trade

Banks are also navigating the issue. Most are willing to finance deals involving Rusal aluminum if the metal dates before the sanctions. But, they’re likely to scrutinize the product’s previous transactions to see if there’s a risk of a violation. For example, banks may want to establish that Rusal or another sanctioned company didn’t receive financing for the metal at any point.

The uncertainties put a large part of the world’s stockpiles in limbo. Russian aluminum has made up a significant proportion of the global aluminum inventories since at least the early 1990s, when the collapse of the Soviet Union triggered a wave of exports.

Metal Tracking

Aluminum from Eastern Europe – likely produced by Rusal – accounted for 450,000 metric tons, or 36 percent, of global stockpiles tracked by the LME, according to exchange data as of April 6. Eoin Dinsmore, head of aluminum at CRU Group, estimated that a quarter, or just under 1 million tons, of global aluminum inventories outside China and outside the LME were likely to be Rusal-produced metal.

Put those numbers together, and the total amount of Russian aluminum sitting in warehouses from Rotterdam to New Orleans would be worth more than $3 billion at current prices.

In practice, the most straightforward way for traders to deal with their stocks of old Rusal metal may be to deliver it to the LME.

Already on Thursday the LME saw its second-largest aluminum delivery in four years. The bulk of the inflow came from Rotterdam and Vlissingen, two locations where traders historically held large volumes of Russian metal.

There could be more coming. Until Tuesday, traders can deliver Rusal aluminum to the exchange as normal. After that, they have to provide evidence that it was produced before April 6 and doesn’t otherwise breach sanctions.

“For stuff on the ground in the U.S., it’s hard to see another option. You’re not going to sell it,” said Dinsmore of CRU. But outside the U.S., the Rusal metal will be in high demand.

“What’s sitting out there in the rest of the world isn’t completely untouchable, people will find the buyers for it. It’s needed to alleviate some of the tightness," he said.

--With assistance from Javier Blas

To contact the reporters on this story: Jack Farchy in London at jfarchy@bloomberg.net, Andy Hoffman in Geneva at ahoffman31@bloomberg.net, Mark Burton in London at mburton51@bloomberg.net.

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Lynn Thomasson

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