By Pratima Desai and Polina Devitt
LONDON (Reuters) -The London Metal Exchange should reconsider a decision not to ban Russian aluminium from its warehouse network as large volumes are jeopardising the benchmark status of its contract, producer Norsk Hydro said in a letter this week.
Top Russian producer Rusal hit back on Friday, saying rival Hydro was aiming to destabilise the market for its own benefit.
Russian aluminium amounted to 80% of available aluminium inventories in LME-registered warehouses in June, compared with 68% in May, 41% in January and less than 18% last October.
While there are no international sanctions on Russian metal, many consumers are shunning aluminium produced by Rusal, which accounts for 6% of global supplies. U.S. import tariffs on Russian aluminium and products are also prompting some consumers to "self-sanction".
Some analysts estimate the discount for Russian aluminium at $100-$300 per metric ton, Norsk Hydro said.
In the letter, seen by Reuters, the Norwegian aluminium producer asked the world's largest forum for trading metals to reconsider its decision last November to keep Russian aluminium in the LME system.
The LME said that it would continue to reflect all relevant government sanctions and tariffs, and monitor for any market orderliness concerns in respect of Russian metal.
"We note that all metals of Russian origin continue to be consumed by a broad section of the market, and we will remain vigilant in respect of this matter," the LME said in an emailed comment.
DESTABILISING?
Removing Russian metal from the supply chain would be "highly destructive" to market structure in terms of market liquidity, Rusal said in a statement.
"Rusal considers these comments to be aimed at destabilising the market and driving anti-competitive behaviour... hence to the benefit of the competitor."
It said it "continues to witness a broad acceptance of its low-carbon aluminium to a wide range of global consumers from across the world."
Hydro asked in its letter if the exchange had consulted or obtained any guidance from Britain's Financial Conduct Authority (FCA) on the risks to the "orderly functioning" of the market from Russian aluminium.
"We continue to engage with the London Metal Exchange on its controls to ensure it meets its obligations to maintain fair and orderly markets, including in the LME aluminium market," the FCA said in a statement.
"We expect the LME to utilise necessary controls to meet its regulatory obligations."
As LME aluminium prices are referenced in contracts between consumers, producers and traders, the dominance of Russian aluminium in the system is a problem, said Norsk Hydro's Chief Financial Officer Paal Kildemo.
"If you are a consumer looking to hedge exposure on LME and if 80% of it is Russian aluminium then you might consider using another market," Kildemo told Reuters.
"There is still a risk that even more Russian aluminium will be delivered to LME further weighing on the reference price."
Aluminium is listed on the Shanghai Futures Exchange (ShFE), but it is not easily traded due to currency and capital controls and restrictions on foreigners, who need to be affiliated with a Chinese company.
Aluminium trading volumes on the CME have been rising for more than a year. They climbed more than 150% year-on-year in May, according to CME data.
In October 2022, the head of metals at exchange operator CME Group (NASDAQ:CME) said it would not block Russian metal unless government rules made it do so.