Metals brokers enjoy fat profits from Rusal chaos

Sanctions against Rusal have caused aluminium prices to rise sharply. (Reuters pic)

LONDON: Surging volumes and volatility in industrial metals so far this year, largely due to US sanctions slapped on Russian aluminium producer Rusal, have been a major money-spinner for several brokers and banks after years of tepid market conditions.

The lurching market, however, has also created difficulties for some managing risk, while producers and consumers have struggled to lock in prices through hedging programs.

Ten London Metal Exchange (LME) members who participated in a Reuters poll have seen profits improve during the first five months of this year, with an average rise of 30%.

The results varied widely, with one reporting a single-digit rise, while another surged about 70%.

“Business has been very, very good for anybody in our shoes that thrives on volatile markets. Trump talking about sanctions on Rusal was enough to really blow the market into the stratosphere,” said the head of metals at an LME broker, who declined to be named.

Volumes on the LME – the world’s largest market for industrial metals owned by Hong Kong Exchanges and Clearing – jumped 31% during the first five months of the year to 80.5 million lots.

April, when the United States imposed tough sanctions on United Company Rusal, was a stand out, with average daily volumes skyrocketing 63%.

Benchmark LME aluminium prices shot up 35% in 10 days to the highest in nearly seven years after US President Donald Trump unveiled the move against Russian oligarchs.

They then slumped about 20% over the next four sessions when Washington relaxed the sanctions.

“I’ve worked in this market for 30-odd years and I’ve never seen volatility like that in any metal market,” the LME broker said.

Huge swings in the aluminium market caught the attention of investors, bringing some out of the woodwork after abandoning commodity markets several years earlier, such as macro-economic hedge funds.

“It’s amazing how many more people are looking at this market. Some of our business is people coming back after having given up in 2015,” the head of another LME broker said.

Brokers’ margins shot up as the volatility created wide spreads between bids and offers.

“When the bid-offer spread is incredibly narrow and everybody’s making the same market, then it can stagnate from a broker’s perspective,” the first broker said.

While aluminum and Rusal caught most of the headlines, other metals also sparked interest, including the best-performing LME metal, nickel, up 18% this year, and copper.

“Copper is a great example of where you’ve got a financial community that is getting very bullish and a merchant-trader community that is much less bullish, which creates a huge opportunity,” the head of a third LME member said.

Many banks, though, had to grapple with the higher risk profile as markets lurched up and down.

“Our risk department have been quite busy with stress tests. And of course, some clients want bigger facilities from us, and we may say no,” the head of commodities at a bank said.

“We’re enjoying high volumes, high commissions, high transactions, but we don’t want our customers to go bust.”

Some aluminum industrial consumers and producers were confounded by the sharp moves after sanctions were imposed on Rusal, said Oliver Nugent, commodities strategist at ING Bank in Amsterdam.

“It’s been very hard. One strategy we like to offer to the corporates is often around options and collar strategies and that has been a more difficult to pitch as volatility picks up,” he said.

“It was a stressful time in April to have consumers ringing you up and saying do I have to do this now and fortunately they listened and they didn’t lock in at those high levels. Unfortunately I think the producers missed the boat.”

While some funds relished the high volatility, those that use systematic or computer-driven investment strategies were not as happy since they prefer steadily trending markets and they had to recalibrate their algorithms, a broker said.

Business has been more steady in recent weeks, but with Trump still on the warpath with trade disputes, LME members are braced for the prospect of more action.

“It’s calmed down this month, but there’s still enough going on that may well bring things back to life,” said Michael Overlander, chief executive of broker Sucden Financial, one of nine top-tier LME members that trade in the open outcry ring.

The first broker added: “From a purely selfish point of view, from a business stimulation point of view, we have a lot to thank him (Trump) for.”