Shanghai Becomes Only Major Exchange Accepting Russian Metals
The war in Ukraine has cemented Russia’s status as China’s top energy supplier
US and UK sanctions on Russian metals will cement China’s status as Moscow’s buyer of key commodities of last resort and strengthen Shanghai’s role as a price-setting venue for materials crucial to the global economy.
The London Metal Exchange’s ban on new Russian aluminum, copper and nickel production is likely to further boost Chinese imports. In addition, the Shanghai Futures Exchange remains the only major commodity exchange in the world accepting Russian shipments of the three metals.
“Russian metals liquidity in European and US markets may continue to decline, and global trading flows will also be restructured,” said Wang Rong, a senior analyst at Shanghai-based broker Guotai Junan Futures Co.
Energy sanctions imposed on Moscow after its invasion of Ukraine have already had a dramatic impact on China’s purchasing habits. Russia overtook Saudi Arabia last year to become China’s largest source of crude oil imports. It is also now the second-largest coal producer and is likely to become Beijing’s largest supplier of natural gas this year.
Even without formal sanctions, China’s imports of Russian aluminum have reached record levels. Russian aluminum giant United Co. Rusal International PJSC generated 23% of its revenue from China last year, up from 8% in 2022. Rusal has also acquired a 30% stake in a Chinese alumina refinery to plug a gap in supplies of a key ingredient amid disruptions caused by the war in Ukraine.
The new sanctions will boost Russian metal exports to countries outside the U.S. and U.K., especially China, Guotai Junnan said. The extra supply will also boost exports of metals made in China as more of the material accumulates within its borders, the broker said in a note. China is the world’s largest producer of refined copper and aluminum, and a major player in nickel thanks to investments in Indonesia.
Bypassing the dollar
Chinese importers have taken advantage of Beijing’s strategic alliance with Moscow to get discounts on key commodities by paying in yuan to bypass the dollar, the currency in which trades are usually settled. That has helped the world’s largest buyer of commodities stave off the inflationary impact of the war in Ukraine, and has also helped Beijing’s bid to supplant the U.S. dollar as the world’s reserve currency.
But increasing supplies from Russia at a time when China’s economy is so sluggish creates its own problems. Chinese metals traders have struggled with weak demand in the past year, and the green shoots of recovery in markets for commodities such as copper are relatively new.
The prospect of more Russian supplies to China widened the spread between London and Shanghai metals in early trade on Monday. While LME aluminum jumped as much as 9.4%, the response on the SHFE was more muted, with gains limited to 2.9% from Friday’s close.
The divergence may be partly due to traders unwinding both LME shorts, or bets that prices will fall in London, and SHFE longs, bets they will rise in Shanghai, to prevent losses from a so-called reverse arbitrage trade, said Harry Jiang, head of trading at Yonggang Resources Co.
Instead, the uneven price rise is closing the door on Chinese aluminum imports in dollars. That could make the Russian metal, if priced in yuan and offered at a discount, more attractive.
China has long sought greater power over global commodity pricing, given its heavy reliance on imports. How that will play out on the Shanghai exchange is complicated by new sanctions rules that will allow older Russian metal to continue to be shipped to the LME, the global benchmark, as well as the Chicago Mercantile Exchange, the leading U.S. exchange.