LONDON, Oct 17 (Reuters) - Aluminium prices dropped on Monday as inventories in London Metal Exchange (LME) warehouses jumped, fuelling fears of unwanted Russian-origin metal in the LME system, traders said.
Benchmark aluminium on the LME was down 2.3% at $2,252 a tonne at 1037 GMT.
Western countries have imposed sanctions on Russian banks and wealthy individuals connected to President Vladimir Putin since Russia's invasion of Ukraine in February, but so far there are no restrictions on buying Russian metal.
However, metal industry sources say there is concern that Rusal (RUAL.MM), will be unable to sell its metal and will deliver it into the LME system, which would distort prices.
Stocks of aluminium in LME warehouses jumped by 65,825 tonnes to 433,025 tonnes on Friday. Of that, 23,525 tonnes were delivered to Gwanyang in South Korea and 44,675 tonnes to Port Klang in Malaysia.
"Port Klang is normally Indian material, Korea could be Russian," one aluminium trader said. "The LME is a market of last resort; that's where metal nobody wants normally goes."
Another trader said it was not possible at this stage to determine the origin of the aluminium delivered to LME warehouses and that you would need access to LMEsword, the exchange's electronic transfer system for warrants.
The LME declined to comment.
Rusal told Reuters that the company did not deliver its metal to LME warehouses and does not plan to do so in future
The company is the world's largest aluminium producer outside China, accounting for 6% of global supplies estimated at about 70 million tonnes this year.
Some of Rusal's clients are securing price discounts when purchasing the company's metal, traders told Reuters last month. Rusal has denied this.
The LME launched a discussion paper this month on the possibility of banning Russian aluminium, nickel and copper from being traded and stored in its system.
Aluminium prices spiked more than 7% last Thursday after Bloomberg reported that the U.S. government was considering restrictions on Russian aluminium imports.
Aluminium is used widely in the transport, construction and packaging industries.
Our Standards: The Thomson Reuters Trust Principles.