U.S. sanctions against the Russian aluminium industry are causing commodities markets to surge, but they may also damage worldwide production capabilities and the availability of consumer goods.
On April 6, 2018, the U.S. Department of the Treasury blacklisted for sanctions seven Russian oligarchs, 12 companies they own or control, along with 17 senior Russian government officials, a state-owned Russian weapons trading company and its subsidiary, a Russian bank.
In a statement, Treasury Secretary Steven T. Mnuchin asserted that, “The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities. Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”
Amongst those targeted is the board of the Russian aluminium production giant United Co. Rusal, and billionaire owner Oleg Deripaska. Rusal represents nearly 9% of the world’s primary aluminium output, a $140 billion industry, and 12% of the world’s alumina production.
Rusal was the largest player on the global aluminium market up until 2015, when it was surpassed by the Chinese-government supported China Hongqiao Group.
Up until that point, the price of aluminium had remained somewhat firm for most of 2018. The announcement of the coming sanctions quickly caused a surge in the price of aluminium, rising it from just over 2,000 dollars per tonne to a high of 2,664.50 US dollars per ton this week. This is the highest price spike in the commodity since 2011.
Now commodity traders fear that depending on how the sanctions balance out, the commodity price on aluminium might continue to surge, up towards 3,000 dollars per ton by early autumn.
Earlier this year another of the world’s largest aluminium producers, Norsk Hydro, was forced to severely cut back production at their Brazil plant after a sewage system leak tainted the raw aluminium stock.
The disruption of production for Rusal and Norsk Hydro in 2018 might cause an abrupt market availability shortfall.
This stands in stark contrast with developments in the aluminium market in recent years, where worldwide consumption of aluminium decreased, the use of recycled metals increased, and between 2014-2016 a supply surplus caused aluminum producers to increase their levels of idle production capacities. The three largest Chinese manufacturers, spearhead by Hongqiao, predictably adjusted their overall production output.
But now, with both Rusal and Norsk Hydro either disappearing from the Western marketplace, or remaining at a severely diminished capacity, there is a risk that there can now be a market metal deficiency.
Nord Pool, the largest largest market for electrical energy and commodities in Europe, suspended Rusal’s Swedish production facility from trade on its exchange on April 18th, after deciding to support the US sanctions. The Kubal smelter in Sweden is Rusal’s primary metal production facility outside of Europe, and equals 3% or Rusal’s production or 123,000 tonnes of metal per year.
The European umbrella organization European Aluminium will be holding emergency meetings throughout the week in Brussels, to attempt to “override” the development.
“Something has to happen in a positive direction, fast. Will there be a shortage of the metal in the world will be felt almost immediately by companies considering that you want to keep as short layers as possible,” said Lars-Inge Arwidson, CEO at the industry organization Swedish Aluminium, on a conference call with reporters.
If the sanctions hit hard, there is not a market segment that will not be impacted. From car manufacturers to furniture manufacturers, all use aluminium in either the end product, or in the manufacturing process. This situation is further complicated by ongoing geopolitical reasons, which have long plagued the commodities market as well as the stability of production capabilities for companies, causing medium to long term difficulties.
In the short-term, the Rusal stock collapsed in response to the developments. Chinese manufacturers, primarily Chalco (the 5th largest aluminium producer), said they will try to immediately ramp up production to combat the shortfall, but the outcome of that initiative has yet to be seen on the marketplace.
In addition to this, the situation has also caused a surge on nickel commodities, rocketing prices to their strongest level since late 2014 due to fears that the US will soon announce broadening sanctions, which would then impact Russian nickel supplier Nornickel.
The three-month nickel index on the London Metal Exchange rallied as much as 9.3 percent to $16,690 a tonne in the recent days, and saw a 16.5% surge in general indexes.
John Sjoholm, Lima Charlie News
[Main image: Ilya Naymushkin]
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