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Chlor-alkali evaluates US sanctions impacts: Analysis

13 Apr 2018 18:24 (+01:00 GMT)
Chlor-alkali evaluates US sanctions impacts: Analysis

London, 13 April (Argus) — The imposition by the US of new sanctions affecting Russian aluminium producer Rusal is the latest development to bring an unexpected challenge to the global caustic soda market this year.

Rusal is responsible for 7pc of world aluminium production and, being integrated into bauxite and alumina, is a major consumer of caustic soda. Rusal is owned and controlled by EN+ Group, which is owned by Oleg Deripaska, one of the high-profile Russians the US government imposed sanctions on earlier this month.

The US Treasury Department on 6 April imposed sanctions on seven high-profile Russians — including Deripaska — and 12 companies those individuals own or control, as well as 17 senior Russian officials, a state-owned weapons trading company and its subsidiary, a bank.

The sanctions mean that since 6 April Rusal is unable to do new business with US-based firms, or the foreign subsidiaries of US enterprises. Existing business can be finalised within 60 days, but with restrictions.

Legal and banking complications are also likely to hamper new business, even with parties not directly affected by the sanctions. The Russian government had indicated that it will step in and provide support to Rusal as it tries to find new markets for its aluminium and rebuild its supply chain, but what form that support may take is still unclear.

Prior to the sanctions, Rusal was set to import around 280,000-300,000/dmt of caustic soda from the US Gulf Coast in 2018, representing around 9pc of expected US Gulf Coast exports. This was principally destined for Rusal's alumina operations in Ireland and Jamaica, as well as its facility in Guinea which it was in the process of restarting.

US producers and traders contracted to supply Rusal need to find new destinations for this material. Some were already dealing with unexpected length in their balances following the reduction in operations at a Brazilian alumina refinery because of licensing restrictions.

The combined impact puts significant pressure on diaphragm grade material. Producers have not been under immediate pressure to sell at lower prices — the Argus US Gulf Coast caustic soda assessment was unchanged this week at $580-630/dmt — but they are evaluating all options for mitigating the unexpected and significant loss of diaphragm grade demand.

Producers' inventories, which were relatively low following operational issues in recent months and planned maintenance shutdowns, are likely to be building again as they continue to operate plants at high rates to take advantage of the low cost natural gas and ethylene available on the US Gulf coast to produce EDC, VCM and PVC.

Producers' willingness and ability to sell caustic soda at lower prices will depend on the value they are generating across their integrated chain and they could choose to cut operating rates in the future. Longer term producers may hope to see an uptick in demand from Asia and Australia if other alumina producers increase operating rates.

Buyers may be willing to wait to see if low-end prices drop. This is an option mainly for those with grade flexibility, as the membrane grade remains relatively tight with good demand. If the price difference between diaphragm and membrane widens, some membrane buyers may find it economically beneficial to swap grades.

For Rusal, if there were no impact on its alumina operations, it would need to replace this material with alternative supply from the global market. How much of their original contract volumes Rusal will need to be replaced is unclear and will be influenced by the impact on the firm's aluminium sales, as well strategic decisions the company may make.

Russia exported nearly 700,000t of aluminium to the US last year, sales which will no longer be possible. Sales of aluminium produced by Rusal are also facing constraints in other global markets. London-based metals exchange LME will introduce a temporary conditional suspension on placing metal on warrant produced by Rusal, with effect from 17 April, following US sanctions.

The suspension will continue until further notice, allowing it to engage with stakeholders to determine the appropriate longer-term approach. Trading firm Glencore is evaluating its position on various contracts it has with Rusal for the offtake of aluminium and alumina.

Rusal is also integrated into wider global alumina and aluminium supply chains with other mining firms. Rio Tinto has announced it is in the process of declaring force majeure on some contracts. Its contracts include an agreement to provide bauxite to Rusal's refinery in Ireland and offtake contracts for alumina that are used at Rio Tinto's smelters, mainly in France and Ireland.

The caustic soda market impact has been muted so far as participants take time to evaluate these developments and formulate strategies. Many alumina refineries have chosen to operate with higher caustic soda inventories because they expect a tight market. If this is the case for Rusal's operations, it will alleviate the immediate need to purchase caustic soda while the firm reviews its requirements. But relatively high global inventories will also limit the alternatives for US producers looking for outlets for diaphragm grade product.

Even if Rusal looks to replace all of its previously planned supply, it may be manageable for the global market from the perspective of availability. The Middle East, where producers have been holding regular tenders for spot material, appears as an option. Northeast Asia also has capacity to supply. In Europe there may be some availability, following recent stable operations, but in smaller lots than is typically supplied out of the US Gulf Coast.

But beyond availability, there will be additional practical, logistic and business challenges in solving the imbalances.