The imposition of sanctions against the Russian aluminum giant Rusal has led to a rapid increase in aluminum prices. Over the past two weeks, the cost of metal on the LME jumped by almost a third to a seven-year high of $2.6 thousand per ton. Investors are buying up metal, because due to the refusal of consumers to cooperate with the Russian company, the world market may face a shortage of aluminum. If the company fails to promptly redirect export flows, metal prices may rise by another 10-15%.
On Thursday, the cost of aluminum at the London Metal Exchange (LME) for the first time since August 2011 rose above the level of $2.6 thousand per ton. According to Reuters, the cost of a three-month futures for the supply of aluminum rose to $2,607 per ton, adding 2.8% on the day.
In two weeks of strong growth, the metal has risen in price by almost 30%, which was the strongest increase in the forty-year history of trading on the LME. Other non-ferrous metals also show growth in quotations, but less significant, by 3-15%.
The key reason for the abnormal growth in the price of aluminum was the imposition of sanctions against Oleg Deripaska’s company Rusal. In response to the sanctions of the largest producers of rolled aluminum, Novelis Corp announced the termination of the purchase of metal from Rusal. Japan also stopped buying aluminum from Russia earlier this week, Reuters reported. According to Rusal Japan, approximately 15% of Japanese aluminum imports came from Russia (about 230 thousand tons), which is completely supplied by Rusal. In the middle of last week, the Swiss commodity trader Glencore declared force majeure on contracts for 50 thousand tons of aluminum, presumably of Russian origin. This was reported by Bloomberg. At the same time, the LME imposed temporary restrictions on Rusal’s aluminum trade due to US sanctions against the company.
Sanctions have disrupted supply chains due to the blocking of dollar settlements, markets are assessing the risks of a decrease in the supply of aluminum, said Daria Zhelannova, an analyst at Alfa Capital. Prior to the imposition of sanctions, Rusal was one of the largest producers of this metal in the world. In 2017, Rusal sold 3.95 million tons of primary aluminum and alloys (6.5% of global consumption), three-quarters of which it exported. The United States accounted for 10% of supplies, and the main exports went to Europe (up to 45%) and Asia (up to 20%). “It should be understood that the demand for aluminum is inelastic, and a slight reduction in the supply of metal on the market can lead to very sharp price hikes. Against the backdrop of Rusal’s problems with the supply of aluminum products to foreign markets, a significant deficit may form at the moment, ”said Vasily Karpunin, head of the BCS Broker stock market experts department. According to Andrei Lobazov, senior analyst for the metallurgical sector at Aton, the sanctions hit the entire production chain: prices are rising not only for metal, but also for the main raw material – alumina.
Under such conditions, an increase in metal prices is inevitable, market participants believe. According to Vasily Karpunin, further developments will depend on what share of Rusal’s exports will leave the market. “It is likely that at the moment even the company itself cannot fully calculate how much it will have to reduce supplies and production volumes in the medium term,” notes Mr. Karpunin. Undoubtedly, the company will try to reorient export flows, but it is rather problematic to reorient the supply chains that have existed for years. “Given that the way out of the current situation is unlikely to be quick, aluminum prices will most likely continue to grow,” Andrey Lobazov notes. According to Vasily Karpunin, under the shock scenario, it cannot be ruled out that aluminum prices, after a short-term correction that began on April 19, may add another 10-15%.
