Look to Equity Darlings for Signs Aluminum Drama Is Here to Stay

(Bloomberg) -- Investors don’t seem to believe that the rally in this month’s favorite equity sector is over, even as the risk of the sanctions that spurred the gains fades.

Despite the drop in aluminum prices that followed the U.S. Treasury’s sudden decision to soften its stance on steps against Russian metals giant United Co. Rusal, money managers aren’t shunning global mining shares. After a quick retreat on Monday following the update from Washington, the Stoxx 600 Basis Resources Index on Tuesday resumed the advance that has lifted it more than 8 percent over the past two weeks, making it Europe’s best-performing sector in the period.

Aluminum traders may be counting on the metal’s return to more normal levels following a resolution of supply constraints caused by the sanctions. But for equity investors, including Societe Generale SA and MPPM EK, it’s too early to say farewell to the metal’s risk premium, which has buoyed the shares of producers. The U.S. crackdown on one of the world’s biggest aluminum suppliers, combined with President Donald Trump’s China tariffs, sent volatility in global metals and mining shares surging to the highest in 13 months. Investors say the swings are here to stay.

“I’d say it’s too early to wave the flag on the effect of sanctions,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. “The recent sanctions have led to a distortion of global trade, aluminum and steel prices. We’re far away from normal as politics run the show.”

Look to Equity Darlings for Signs Aluminum Drama Is Here to Stay

The biggest gainers among mining stocks in European trading on Tuesday included Glencore Plc, which climbed 1.5 percent and BHP Billiton Plc, up 1.4 percent. Rio Tinto Group advanced 0.7 percent. Corporate executives and Russian government officials joined investors in expressing skepticism about the relief from U.S. sanctions.

On Monday, the U.S. Treasury discussed a path for lifting the sanctions on Rusal, saying it would provide relief if oligarch Oleg Deripaska relinquished control. It also extended the deadline for companies to wind down dealings with the Russian aluminum producer by almost five months.

A senior executive from Aluminum Corp. of China Ltd. on Tuesday said there’s no chance the company will buy aluminum from Rusal or sell it alumina as U.S. sanctions threaten to freeze the Russian producer out of global markets. Tolga Egrilmezer, Rio Tinto’s vice president for aluminum sales and marketing, said it’s too early to say if Rusal’s situation has changed.

“Risks to aluminum prices remain, since the deadline for Rusal sanctions has simply been pushed back until October and we expect the volatility to persist,” said Christian Georges, an analyst at Societe Generale SA in London. “Chinese aluminum is likely to provide the missing volume in global supply, but if alumina is lacking it’s a problem for many producers.”

The shares of European automakers brushed off the decline in aluminum prices since, according to Commerzbank AG’s Demian Flowers, these companies care more about the price of steel.

Global mining stocks are the best performers in the MSCI World Index after energy since April 6, when the U.S. announced its sanctions against Rusal.

“Aluminum’s volatility should stay elevated until the end of the year, because the carry equilibrium of the market has become disrupted through the sanctions, and it will take time to get a really good idea where the supply-demand balances are,” said Christian Gerlach, a money manager at GAM Investment Management in Zurich.

Look to Equity Darlings for Signs Aluminum Drama Is Here to Stay

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