A worker at an aluminium smelter. (Photographer: Andrey Rudakov/Bloomberg)  

Goldman Sachs Warns Rusal Shock May Drive Aluminum to $3,000

(Bloomberg) -- Goldman Sachs Group Inc. says that the extraordinary rally in aluminum unleashed by U.S. sanctions against United Co. Rusal may have way, way further to go, forecasting the metal may spike to $3,000 a metric ton, while raising the possibility of further curbs against Russian coal supplies.

The metal may surge to between $2,800 and $3,000 in the near term as the U.S. moves against the second-largest producer have “dramatically affected” the market, the bank said in a note received Wednesday as it boosted price predictions for three, six and 12 months. The $3,000 target is 25 percent above Tuesday’s close, and almost 50 percent above the price before the curbs.

“U.S. sanctions on Russian oligarchs and the companies that they own or control have dramatically affected the aluminum market,” the bank said. “The uncertainty associated with our forecasts is great. In the event that resolutions are not found quickly enough, prices are likely to exceed our forecasts.”

The global aluminum market has been upended by the U.S. action against Rusal, which has triggered a worldwide supply shock as buyers seek alternative output, while producers also weigh the fallout for alumina, the semi-processed product that’s needed to make the metal. Aluminum prices have already skyrocketed to six-year highs, and Goldman expects further gains before a reversal that may pull them back down to below current levels.

Goldman Sachs Warns Rusal Shock May Drive Aluminum to $3,000

“There is still upside to aluminum prices despite the extraordinary rally,” the bank said. “The Russian sanctions came at a time when the upstream alumina market was already facing tightness due to operational issues at the Alunorte refinery in Brazil,” it said, referring to Norsk Hydro ASA’s refinery.

On Wednesday, the metal climbed as much as 2.3 percent to $2,460 a ton on the London Metal Exchange, the highest intraday level since 2011, and traded at $2,453 at 9:27 a.m. in London. Goldman’s three, six and 12-month outlooks were raised to $2,500, $2,300 and $$2,000.

Alumina has surged along with aluminum since the U.S. salvo against Rusal, and there are forecasts it too will go on rising. Alumina prices are heading toward record highs as buyers scramble to secure material after the sanctions, according to India’s state-run giant National Aluminium Co., or Nalco.

Coal Curbs?

Goldman’s note also addressed the possibility of sanctions against other Russian commodities. “In the event that additional sanctions target Russian coal producers, which are a major supplier to European and East Asian markets, the long-dated aluminum price may also become unanchored,” it said. “Even the partial loss of Russian coal supply would be enough to tighten the market given spare mining capacity is scarce after years of under-investment.”

While aluminum prices are expected to rally further, they’re also seen retreating when the market adjusts, including the possibility of more exports from China and a restructuring of Rusal’s operations, according to the note. “We expect aluminum prices to fall back to $2,000 a ton in 12 months,” it said.

Before then, Goldman laid out Rusal’s likely problems in sustaining output. Even if the company can find buyers for its primary aluminum, there are risks in sourcing sufficient volumes of alumina and bauxite, a large share of which comes from operations outside Russia, as well as third parties, the bank said.

“In a scenario where Rusal’s Russian operations are cut off entirely from foreign supplies, its domestic alumina production would be enough to sustain only 1.5 million tons of its 3.7 million ton aluminum production,” it said. “Annual aluminum production losses would thus amount to 2.2 million tons.”

©2018 Bloomberg L.P.