LONDON - 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 aluminium contract, producer Norsk Hydro said in a letter this week.

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. US 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/t to $300/t, Norsk Hydro said.

The Norwegian aluminium producer in the letter, seen by Reuters, asked the world's largest and oldest forum for trading metals to reconsider its decision last year to keep Russian aluminium in the LME system.

It also asked if the LME 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.

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.

As LME aluminium prices CMAL3 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... There is a clear risk that the market, supported by the LME, is becoming more and more uneven."

Aluminium SAFc1 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 ALIc1have been rising for more than a year now. They climbed more than 150% year on year in May, according to CME data.

However, in October last year, the head of metals at exchange operator CME Group said it would not block Russian metal unless government rules made it do so.

"Hydro is both a producer and buyer in the aluminium market and we are highly dependent on a well-functioning market for price discovery," the company said in the letter, which also asked about the FCA's role in decision making at the LME.

Hydro said in the letter it would like to know whether limits on the amounts of Russian metal or suspending deliveries to LME warehouse would be considered by the FCA as an appropriate way of mitigating risks to an orderly market.

The FCA and Rusal did not reply to Reuters' requests for comment.