• The United States and the United Kingdom recently unveiled new sanctions against Russia, targeting the industrial metals sector.
  • Starting on April 19, Russian producers of aluminum, copper, and nickel are prohibited from exporting their output to the U.S. or the U.K., and financial exchanges in these two countries will no longer accept metals of Russian origin. 
  • These three markets have benefited from improved sentiment in the wake of the new sanctions, with copper looking exceptionally well-positioned through the end of 2024 (and beyond). 

Industrial metals like copper, aluminum and nickel have been rallying in early 2024, and this sector got another boost in mid-April, when new sanctions were leveled against Russian producers.

The sanctions—announced jointly by the United States and the United Kingdom—are intended to limit the export of industrial metals produced in Russia. However, these new rules will probably just shift those exports to other regions of the world, as has been observed in the crude oil market.

The sanctions specifically targeted metals delivered to commodities exchanges, such as Chicago Mercantile Exchange and the London Metal Exchange in the United States and the United Kingdom. As of April 19, these exchanges are forbidden from accepting new deliveries of Russian aluminum, copper and nickel. Moreover, Russian producers are banned from exporting these metals to the U.S. and the U.K. 

Importantly, the new rules aren’t designed to impinge the broader physical market—Russian producers can still sell their output to global buyers outside the U.S. and the U.K. Industry experts have interpreted this to mean that the sanctions are tailored to force Russian producers to sell their output at a discount, while avoiding major disruptions in the global supply chain. 

According to various sources, Russia is a key global producer of these three metals, accounting for roughly 6% of global nickel production, 5% of global aluminum production and 4% of global copper production. It should be noted, however, that Russian influence in the global industrial metals markets has deteriorated in recent years. According to The Wall Street Journal, Russia generated only $15 billion from its metals industry in 2023, as compared to $25 billion the year prior. 

Not surprisingly, China is expected to be the prime beneficiary of the latest sanctions, as has been the case with the crude oil sanctions leveled against Russia in early 2023. Last year, Russia became China’s top supplier of crude oil, supplanting Saudi Arabia. And with exchanges in the U.S. and the U.K. now off limits, the Shanghai Futures Exchange is the only major financial futures outlet that can accept deliveries of Russian-made aluminum, copper and nickel. 

Exchanges store the physical commodities underpinning futures contracts to help facilitate physical delivery (as necessary) when futures contracts expire, thus ensuring the seamless execution of transactions on the exchange. The exchanges verify the quality of these commodities before taking delivery, which helps ensure the integrity and reliability of global futures markets. 

The prices of aluminum, copper and nickel have all rallied in 2024, and the recent sanctions appear to have contributed to fresh bullish sentiment in these markets. More details are outlined below. 

Copper market

Copper is one of the world’s most widely used metals and analysts expect demand to strengthen in the coming years. Copper is an excellent conductor of electricity, making it a suitable material for the burgeoning electric vehicle (EV) industry.

On top of that, copper is also utilized for the transmission of data and signals, making it a key building block in the technology industry. Copper wiring is used extensively in data centers, processors, and other electronic components, which means copper’s fortunes are closely intertwined with the ongoing artificial intelligence revolution.

Importantly, the copper industry hasn’t invested enough in the development of new mines. And for this reason, industry experts expect that demand growth will outstrip production growth during the near future. Not surprisingly, copper prices are expected to benefit from this supply-demand dynamic.

As a result of that outlook, Citibank believes that the copper industry is entering a major secular bull market. And in the opinion of Citibank analysts, the forthcoming era will represent the second major secular bull market of the 21st century. 

Copper prices have already rallied by about 14% in 2024, and Citi is forecasting that prices will reach $10,000/ton by the end of this year. Currently, copper trades for about $9,600 per ton

Copper Near 15-Month High

After the latest sanctions against Russia were announced, the copper market jumped by about 8%. The big question going forward is whether global economic growth will spur increased demand for copper during the remainder of 2024.

In the first quarter of 2024, China imported about 7% more copper than it did during the first quarter of 2023. Copper is utilized across a wide range of industries, including construction, electronics, energy, manufacturing, technology and transportation. As a result, many have interpreted the uptick in Chinese demand as a sign that its economy may be finally recovering.

Speaking to recent optimism in the global copper market, Ewa Manthey—a commodities strategist at ING Bank—recently said, “Investors [are] now betting that China is recovering, demand is coming back, and also elsewhere, manufacturing activity is improving.” Manthey added, “Plus, all the micro drivers are supportive like tightening supply of copper concentrates.”

Aluminum market

Unlike copper, the global aluminum market has been beset by weakening demand in recent months. And with global supplies at healthy levels, aluminum prices weren’t expected to outperform in 2024. Underscoring that outlook, ING indicated in late 2023, “Our short-term outlook remains neutral to bearish for [aluminum] demand, and we do not foresee a substantial recovery before the second quarter of 2024.

Considering this market dynamic, the new sanctions targeting the Russian industrial metals sector have injected fresh optimism into the aluminum market. After the sanctions were announced last week, the global aluminum giant Alcoa (AA) expressed fresh optimism over aluminum prices in 2024.

According to Alcoa, many global aluminum buyers were already steering clear of aluminum produced in Russia, which created a supply glut—some of which was absorbed by the London Metals Exchange. Alcoa estimated that upwards of 90% of the aluminum stored by the London Metals Exchange is of Russian origin. A significant amount of Russian aluminum has also been redirected toward China in recent years, as illustrated below.

Russia's Dependence on Chinese Buyers

So far in 2024, aluminum prices are up about 10%. However, prior to the new sanctions, aluminum prices were only up 4%, illustrating just how impacting the sanctions have been. Contrary to the copper market, however, aluminum isn’t entering a secular bull market. 

The sanctions certainly add a new wrinkle to this market, but without a corresponding uptick in demand, it’s hard to envision a prolonged uptrend in aluminum prices. On the other hand, if global economic growth were to unexpectedly strengthen, and Chinese demand picked up, then bullish sentiment could become a more pervasive force in the aluminum market.

Speaking to the potential for renewed optimism in the industrial metals sector, Amy Gower—a metals strategist at Morgan Stanley—recently opined: “While the new restrictions do not stop the trade of Russian metal, we could see some temporary upside support for prices of copper, aluminum and nickel.”

In terms of end use, the transportation, packaging, and construction industries heavily use aluminum. Like copper, the relative strength of demand in the aluminum market can be indicative of underlying trends in the world economy. However, copper’s utilization spans a wider swath of industries, which is why copper is typically viewed as a better indicator of future potential in the underlying economy.

Nickel market

The latest round of sanctions against Russia also include nickel, another key industrial metal. Much like aluminum and copper, Russia can no longer deliver its nickel to commodities exchanges in the United States and the United Kingdom.

Of the three metals, nickel represents a much smaller market. Last year, roughly 3.6 million tons of nickel were added to the global supply chain. In comparison, annual copper production is closer to 22 million tons. Aluminum production is even higher, at roughly 68 million tons, but a significant amount of aluminum is recycled, which significantly augments that figure.

Russia’s share of the raw nickel market is somewhat larger than its presence in the aluminum and copper markets: 6% versus 5% for aluminum and 4% for copper. But Russia is a major player in the refined nickel market, controlling about 14% of annual production, as illustrated below.

Russia is a key global producer of class 1 nickel

Importantly, it’s refined nickel that typically trades on commodities exchanges, which means the latest sanctions could impact this market more so than the other two. That may help explain why nickel prices are up 18% for the year to date, with the bulk of those gains coming in the wake of the sanctions. 

However, it’s important to note that the use of nickel is far narrower in scope than that of aluminum and copper. Approximately 65% of all nickel produced worldwide is used to manufacture stainless steel. Nickel plays a crucial role in enhancing the properties of stainless steel, by improving its corrosion resistance and overall strength. 

The construction and kitchen appliance sectors are heavy users of stainless steel due to its durability and ease of maintenance. Other large consumers of stainless steel include the medical industry (surgical instruments and implants), the transportation industry (parts that require resistance to elevated temperatures and corrosion) and the food processing industry (equipment and utensils).

Russia is a key global producer of class 1 nickel
S&P, Antaike, INSG, SMM, ING Research

Final takeaways

So far, all three industrial metals—aluminum, copper and nickel—have benefited from an uptick in bullish sentiment since the new sanctions against Russia were unveiled. 

Looking ahead, however, that trend probably won’t persist without help from the underlying economy. If demand picks up for these metals, the sanctions could help amplify future gains. But if demand remains at current levels, it’s hard to envision a sharp spike in the prices of these commodities.

The one exception is the copper market, which has purportedly entered a secular bull market. Copper is heavily utilized by some of the fastest-growing segments of the world economy, such as artificial intelligence, electric vehicles and green energy. 

As such, investors and traders bullish on the global economy in 2024 may want to consider the future potential of the copper sector, whether that be copper-focused futures (/HG), stocks or exchange-traded funds. Some of the best-known copper stocks include Freeport-McMoRan (FCX) and Southern Copper Corp (SCCO), which are up 15% and 29%, respectively, year-to-date. Intriguingly, Freeport-McMorRan also offers exposure to the surging gold market

In terms of exchange-traded funds (ETFs), investors and traders can also consider Global X Copper Miners (COPX) and United States Copper Index Fund (CPER), which are up 20% and 17%, respectively, so far in 2024. For more background on the 2024 copper market, readers can also check out this installment of Options Trading Concepts Liveon the tastylive financial network.

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor Luckbox magazine.

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