Market Update 7th October 2024

Cross Border Trades

Global trade is always more complex than it seems. Bans or large tariffs on trades may appear significant but there is always a way to get around them. I had a conversation with the fund manager at Havelock recently and we got onto this very topic, specifically titanium trading.

In 2022 the UK, US, EU and other G7 nations revoked Russia’s most-favoured-nation status, which meant Russia now doesn’t have to be treated fairly in terms of trade by these nations. The UK also added a 35% tariff on all Russian nickel in 2022, and in 2023 restricted all acquiring, importing, supplying and delivering of Russian-origin metal by UK persons. Then in 2024 the UK and US imposed a suspension on derivatives, including warrants, of any Russian metal.

Canada was the first Western country to sanction supplies of titanium from Russia in February 2024. The new sanctions this year were part of a package to mark the second anniversary of the invasion. Before the 2022 invasion of Ukraine, Russia supplied 25% of the world’s titanium, and houses the world’s largest titanium producer, VSMPO-AVISMA. The company also produces aluminium, magnesium, and steel alloys.

The main use of the metal titanium is in the aerospace and defence industries. So, the titanium supply chain is important for many countries, both the EU and the US have listed titanium as a metal of critical importance. Companies like Boeing terminated their contracts with Russian suppliers in 2022. Whereas Airbus and Bombardier continued to supply Russian titanium in 2022. In fact, Airbus increased its supply from Russia between February 2022 and March 2023.

When the new sanctions from Canada came into play in February 2024, this would have meant companies like Bombardier would need to source their titanium outside of the Russia supply chain. By May 2024, both Airbus and Bombardier had received waivers from the Canadian government against these sanctions so can still trade in Russian titanium, mainly trading with VSMPO-AVISMA.

Reasons for this come from current military aircraft projects which require titanium. The aircrafts in question are made by Airbus, hence the waiver to this European company. In fairness, Airbus have said they isolate their own supply chain, but the titanium supply chain is very complex and involves many stakeholders, so it can be difficult to isolate out Russian titanium completely.

Metals aren’t the only area where there are roundabout ways to get past sanctions. The UK car industry has simultaneously taken its direct car exports to Russia to zero in 2022, and has seen a 2000% increase in car exports to Azerbaijan. In January 2024 alone the car exports from the UK to Azerbaijan totalled over £40m.

The UK has a ban on exporting to Russia any dual use products which can be repurposed as weapons in the Ukraine conflict, and sanctions on trading cars worth over £42k. There might be a booming car business in Azerbaijan from 2022, but also instantly as exports to Azerbaijan increased from the UK, Azerbaijan car exports to Russia rose in line.

It seems likely that these sorts of work arounds will continue to happen. When Trump first threatened higher tariffs on China not too many were worried. Mainly because this would impact so called red states more, but also because of the potential for work arounds. Some Chinese companies have started building warehouses in South-East Asian countries which would be used for exports, or even potentially trading through Mexico.

The point is there is always supply chain and trade complexities. This will become more important as companies will start having to understand their entire supply chain in detail and even start to report on these.

Regulations in the UK, such as the anti-greenwashing and SDR, will demand a higher onus on the investment industry to hold companies accountable and understand the investments they are making. Now I doubt Airbus or Boeing are in any ESG investment funds, but are supply chains of metals used heavily in the energy transition all sourced ethically…? Probably not.

Emily Cave – Research Analyst

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