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US sanctions cause aluminium market uncertainty

13 Apr 2018 16:57 (+01:00 GMT)
US sanctions cause aluminium market uncertainty

London, 13 April (Argus) — US sanctions on Russian aluminium producer Rusal's owner, Oleg Deripaska, have caused uncertainty in the global aluminium market and are likely to cause a tighter market balance over the long term.

On 6 April, the US placed sanctions on seven high-profile Russians, including Deripaska, which froze Rusal's US assets and prohibited US citizens from doing business with the company.

This has had a direct effect on the US market because US banks will not finance Rusal metal, and US traders and customers are unwilling to handle material produced by the group.

The sanctions are also having a wider impact on other markets. US banks operating in Europe will not finance Rusal metal and European banks and market participants are reluctant to handle Rusal material for fear of association.

"Non-US persons could face sanctions for knowingly facilitating significant transactions for or on behalf of the individuals or entities blocked," the US Treasury said late last week.

Global production

Rusal is the world's second-largest aluminium producer, with output of 3.7mn t last year, around 7pc of the global total.

China produces around 50pc of the world's aluminium, consuming most of this domestically, meaning Rusal's share is 13-14pc, excluding Chinese production.

Imports account for around 90pc of US aluminium demand of just under 6mn t/yr.

The US imported 5mn t of unwrought aluminium in 2017, with 695,778t coming from Russia, equivalent to 14pc.

Russia was the second-largest aluminium exporter to the US, behind Canada, which shipped 2.5mn t of unwrought aluminium to the US last year, or 50pc of US imports.

Other major aluminium exporters to the US include the UAE, which accounted for 13pc of US imports last year, and Argentina, which made up 5pc, according to customs data.

Rusal's end-customers include Switzerland-based commodities trading and mining firm Glencore, Japanese carmaker Toyota, Russian metals manufacturing firms SMZ and KUMZ, and Switzerland-based trading firm Mechem.

Glencore has offtake agreements with Rusal for aluminium and alumina and said this week that it is evaluating its contractual position with the Russian producer. Rusal sold 29.86pc of its excess alumina in monetary terms to Glencore in 2016.

Glencore chief executive Ivan Glasenberg resigned from his position as a director of Rusal on 10 April.

UK-Australian mining firm Rio Tinto said on 13 April that it is also in the process of declaring force majeure on certain contracts, including associated and supply offtake agreements with Rusal, after the imposition ofn US sanctions.

Rio Tinto supplies bauxite to Rusal's Aughinish alumina refinery in Ireland, which in turn supplies alumina to Rio Tinto's aluminium smelters in Iceland and France.

Exchanges suspend Rusal aluminium

As a result of the sanctions, London-based metals exchange the LME issued a temporary conditional suspension on placing Rusal-produced metal on warrant, with effect from 17 April.

Chicago-based metals commodity exchange Comex also removed Rusal-produced metal from a list of approved brands on 11 April.

LME aluminium stocks in European warehouses started rising in the days after the LME announcement, as market participants sought to put metal on warrant before the 17 April deadline.

Global aluminium stocks stood at 1.35mn t on 12 April, up by 7.6pc from 1.25mn t on 11 April. European stocks increased by 100,425t, with all metal delivered into Vlissingen and Rotterdam warehouses in the Netherlands.

Cancelled warrants have also increased as traders look to take non-Rusal metal off the exchange. Cancelled tonnage — material earmarked for delivery — increased by 35pc to 370,350t on 13 April from 274,575t on 12 April.

Prices and premiums rise

US sanctions have had a significant impact on aluminium prices and premiums because of the potential they create for a tighter global market.

The three-month aluminium contract on the LME had risen by 16pc from $1,988/t on 6 April to $2,303.50/t on 13 April, the highest since 2012.

LME spreads have moved into backwardation. The cash-to-three-month aluminium spread on the LME was in a $22/t backwardation on 13 April.

US aluminium billet premiums increased to their highest in four years in the latest Argus assessment on 11 April.

Many US extruded aluminium producers rely on billet from Rusal and do not have any immediate replacement options to source material.

A number of vessels carrying Rusal products in Baltimore and Houston have been unable to unload because of the sanctions, according to market participants.

Denis Nushtayev, head of research at Rusal, said at a conference in Dusseldorf, Germany, this week that it was not easy to quickly redirect exports of aluminium billet and slab. But he added that Rusal would try to redirect P1020 deliveries.

The US Midwest premium for P1020 was assessed at 21-22¢/lb on 11 April, up from 18-18.5¢/lb the previous week, rising to levels last seen in 2015.

European premiums were unchanged on 11 April, as market participants waited for clarity and were wary of handling Rusal metal.

US sanctions look to be a driver for aluminium premiums, but could have the opposite effect on LME aluminium spreads.

Ex-China market could tighten

Over the long term, US sanctions are likely to tighten the global aluminium market if traders and consumers continue to avoid handling Rusal metal.

Market participants in Europe are divided on whether there will be a widespread rejection of Rusal material or whether a two-tier market will develop, with Rusal aluminium trading at a discount to exchange-approved brands.

If Rusal material is rejected in the European market it is also possible that it could be delivered to other global locations.

China is one possible destination, but the country already has a domestic aluminium surplus.

China imported just 17,426t of unwrought aluminium from Russia last year.

Turkey is another possible export destination. It imported 256,402t of unwrought aluminium from Russia last year, 24pc of its total imports.

But the immediate impact has been widespread uncertainty across the aluminium supply chain, with participants looking for clarity and market direction as a significant quantity of global supply looks likely to be impacted.