A worker positions a crane arms on an aluminum ingot in a foundry. (Photographer: Andrey Rudakov/Bloomberg)  

Rusal Sanctions Offer Light Comfort for Aluminum Prices

(Bloomberg Gadfly) -- It's not every day that a press release takes 6 percent of the world's aluminum off-line.

That's what the U.S. Treasury Department's announcement Friday of sanctions on United Co. Rusal Plc and its co-founder Oleg Deripaska did, making it risky for most global companies to deal with the largest producer of the metal outside China.

Rusal Sanctions Offer Light Comfort for Aluminum Prices

The tepid initial reaction of metal markets should be a warning for those betting on a rapid jump in prices as China's industrial machine wakes from its winter hibernation. LME three-month futures rose about 1.6 percent after the announcement, a move that's been exceeded roughly once every four weeks over the past year -- although the 2.5 percent gain early Monday suggested a deepening concern.

In some ways, the 10 percent pullback in aluminum prices this year is a natural reaction to the metal's 34 percent advance in 2017, its third-best annual run in three decades.

With global demand already running hot, supply-side factors gave aluminum an extra boost in recent months. In China, which accounts for more than half of global production and usage, smelters have been shuttered as the government tackles overcapacity. China Hongqiao Group Ltd., the world's biggest producer, alone removed 2.68 million tons of capacity last year, more than the output of Alcoa Inc.

Rusal Sanctions Offer Light Comfort for Aluminum Prices

In the U.S., President Trump's tariffs on imported metal are tightening a market that depends on trading partners for about 60 percent of supply. A surge in premiums that U.S. Midwestern consumers pay over the London Metal Exchange benchmark for prompt delivery has meant that, while their counterparts in Europe and Japan are getting the cheapest metal since August, American raw materials costs are little changed.

How has all that failed to raise prices? The best explanation is that the promised supply constraints fueling the 2017 rally haven't materialized. In China, 4.05 million tons of production capacity was added last year, and a further 3.25 million tons will come on stream in 2018, according to Bloomberg Intelligence. In the U.S., the prospect of tariffs is leading companies to restart smelters that were previously too old and low-margin to compete.

A look at deliverable metal inventories shows how baggy the market remains. While many traders have been focused on the decline and fall of the giant LME glut built up by investors trying to play the metal futures curve in the wake of the 2008 financial crisis, official stockpiles in Shanghai have been growing at a headlong pace. Chinese deliverable stocks are now within 29,000 tons of the LME total for the first time on record, and across the two exchanges the stockpile is at a two-year high.

Rusal Sanctions Offer Light Comfort for Aluminum Prices

It's possible that a rapid pick-up in demand could erode that mountain in short order -- but it could equally prompt a surge in supply. Even with rising costs for the key raw material of alumina, smelters have been enjoying some of the best profits since 2014 over the past year, giving them ample reason to pump up output. 

Rusal Sanctions Offer Light Comfort for Aluminum Prices

Furthermore, the bullish consumption outlook could fade as the same trade war fears that are giving a boost to the supply side start to dent prospects for demand. Citigroup Inc.'s index of surprises in global economic data is back in negative territory for the first time since August. 

Aluminum has ridden a wave of growing confidence about the global economy over the past year. Should it break, investors could end up getting dumped.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

To contact the author of this story: David Fickling in Sydney at dfickling@bloomberg.net.

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