When aluminium hit its all-time high of $4,073.50 per tonne in March, it did so in direct reaction to Russia’s invasion of Ukraine.
The market was pricing the potential loss of metal from Russia’s Rusal, which produced 3.76 million tonnes in 2021.
Aluminium traders had seen this movie before back in 2018, when US sanctions on Rusal’s owner Oleg Deripaska caused massive upheaval along the entire length of the global supply chain.
This time around, however, there have been no government sanctions on Rusal’s aluminium in response to the Kremlin’s self-styled “special military operation” in Ukraine.
Indeed, Russian supply shows every sign of increasing as Rusal ramps up a new smelter and looks to export more metal as domestic demand weakens.
But who will buy all this aluminium?
Self-sanctioning is likely to disrupt normal sales channels next year with the possibility of Russian metal flowing to the market of last resort, the London Metal Exchange (LME).
The only government to take direct action against Russia’s aluminium sector has been Australia, which in March banned the export of bauxite and intermediate product alumina to the country.
That effectively froze Rusal’s alumina off-take stream from the Queensland Alumina joint venture. Another key alumina supply channel was shut off by the closure, also in March, of the Nikolaev refinery in Ukraine.
The alumina gap, however, is being filled by Chinese producers, which have dramatically stepped up exports to Russia.
China has shipped 577,000 tonnes of alumina to Russia since March, compared with just 1,250 tonnes in 2020 and 1,750 tonnes in 2021.
The flows have been strong enough to tilt China towards being a net exporter for the first time since early 2019 and appear to have allowed Rusal to lift production despite the disruption to its own raw materials supply chain.
Rusal has stopped publishing its production numbers, which makes it hard to assess what operational challenges it may or may not be experiencing in running its Siberian smelter network.
The company started energising the new Taishet smelter in December last year and was planning to ramp up to first-stage capacity of 428,500 tonnes over the course of this year.
The International Aluminium Institute’s (IAI) monthly production reports suggest that Taishet may indeed be boosting Rusal’s output.
Annualised production in the IAI’s “Russia and Eastern Europe” category was 4.12 million tonnes in August, unchanged from March. Yet these regional figures include Romania, Slovakia and Slovenia, all of which have seen smelter capacity shuttered due to high energy prices.
The inference is that Rusal’s production growth is offsetting falling run-rates in the rest of the region.
Certainly, the flow of Russian metal into Western markets has been robust since March.
European average monthly imports were up by 13% year-on-year in March through June, while the United States soaked up 21% more Russian metal in the same period.
The unfettered flow of Russian metal into the US market is causing serious problems for local producers, according to Jakob Stausholm, chief executive officer of Rio Tinto, which holds extensive smelting assets in Canada. “It just looks strange”, Stausholm told Bloomberg News.
From a purely market perspective, though, it’s not strange at all, given the US physical premium flexed out to $880 per tonne over the LME cash price at one stage in April. That extreme premium sucked in every spare unit of aluminium, including a lot of surplus Russian metal.
Which buyers have obviously been taking. Absent formal sanctions on Russian aluminium, most Rusal customers seem to be accepting deliveries under existing contracts or taking up spot metal from intermediates.
That, however, is going to change next year.
Novelis, a division of Hindalco Industries, and Norsk Hydro’s extrusions unit have already said they will not enter into new Russian purchase contracts for 2023.
Plenty more smaller operators are also joining the self-sanction movement, which spells trouble for Rusal and potentially the aluminium price.
A partial boycott will coincide with increased Russian supply as Rusal’s domestic market weakens further under the broader economic sanctions package.
Goldman Sachs thinks Russian metal exports will increase by around 340,000 tonnes this year and by another 200,000 to 3.6 million tonnes in 2023.
Increased exports will hit a European market that is now rapidly heading into recession as high power prices, another consequence of Russia’s action in Ukraine, stifle demand.
There is obviously potential for Rusal to direct more metal to physical buyers in Asia, particularly China.
Chinese imports of primary aluminium collapsed by 77% over the first eight months of this year but those from Russia were down by only 9%. Indeed, Russian imports of 231,000 tonnes accounted for 78% of all inbound shipments.
Imports of Russian alloy have also surged in recent months, totalling 42,000 tonnes in January-August, compared with 33,000 tonnes over all of last year.
China’s aluminium sector, though, runs on its own internal cycle and it may not be able to absorb immediately what Western buyers don’t want.
You can understand why the aluminium market is starting to worry about the prospect of large volumes of unsold Russian metal being dumped into LME warehouses.
Rusal is looking at the option of shipping from Russia’s eastern seaboard to LME warehouse locations in Asia, according to Bloomberg.
The fear is that significant inflows of Russian metal into the LME system could turn the aluminium contract into a “de facto” Russian contract with a corresponding discount to Western market pricing.
The LME has said it is monitoring the situation. It’s in a tricky situation, given the lack of official sanctions against Russian metal.
Yet the Russian question is likely to cause more ructions in physical aluminium pricing, adding an extra dimension to existing regional and nascent low-carbon premium structures.
It’s hard to see how the LME aluminium contract isn’t going to be affected in some way by the shifts in physical pricing, even if Rusal can find an alternative home for its metal.—Reuters