Trump's sanctions could entirely cock the LME aluminium contract

An interesting example of quite how complex a modern economy is – and therefore the impossibility of planning it. Too many parts connect with other parts for changes in any one detail to not reverberate through the system. So it is with Trump’s latest sanctions against naughty Russians. It’s possible that this will entirely cock the LME’s aluminium contract – the world’s benchmark price for this material.

The FT:

The world’s largest metals exchange has said it won’t accept any more aluminium produced by Rusal after April 17 unless the owners can prove it does not violate the latest set of sanctions.

That has spurred a rush to withdraw non-Russian metal from the LME’s warehouses. About a third of the aluminium in LME-registered warehouses around the world is now set to be released on to the market, according to data from the exchange.

If all non-Russian metal leaves the LME, the danger for the 140-year-old exchange is that it could end up full of metal that no one wants. That would raise awkward questions about the status of the LME’s aluminium contract as a benchmark for global prices.

There’s a vast market in futures and options in aluminium. This is how real world producers and users of the stuff get to lay off risk to the speculators to the benefit of all parties involved. The actual method is that you can buy those futures and or options – running either way, calls or puts – and can settle by accepting or delivering as appropriate aluminium into or out of the warehouses. The important point here being that the metal must be registered. Certain producers are so, meaning that the exchange has crawled all over their metal, their production methods and said “Yup, that’s good stuff.”

But what happens when certain good stuff is no longer good? We’ve a version of Gresham’s Law here, bad money drives out good.

Given the sanctions against Deripaska that means that the material from his company, Rusal, can’t be used by many to most American connected – ie most – people. That creates a scramble for the non-Rusal material in the warehouses, meaning that we might end up with the LME contract being based on the prices of metal that few can uses – that Rusal material clogging up those same warehouses.

This isn’t to say that the sanctions are right or wrong, nor that Deripaska’s a good guy or not. It’s just to point out how complex this modern economy is and how seemingly mild changes in one bit of it have rather large effects elsewhere. All of which is a good little lesson in why we cannot plan it of course.