Aluminum Bears on Treacherous Ground as Supply Shocks Continue

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(Bloomberg) -- One of the few hedge funds to survive the downswing in the commodity supercycle has a lesson for traders trying to navigate whipsawing aluminum prices: go short at your peril.

While supply fears faded this week after the U.S. eased sanctions against United Co Rusal, traders should be alert to the risk that further disruptions will leave buyers short at a time when usage is booming, according to Ingrid Sternby, a senior research analyst at Blenheim Capital Management, the hedge fund founded in 1988 by famed commodities trader Willem Kooyker.

The risks of betting against disruptions were evident on Thursday. Aluminum prices surged as much 5.5 percent from earlier lows after people familiar with the matter said Rusal’s billionaire owner Oleg Deripaska has no plans to cede control of the Russian producer. That helped to pare heavy losses after the U.S. Treasury said it may lift sanctions if there was a change of ownership and gave buyers more time to wind down contracts before the measures kick in.

“I think trading anything short at the moment is dangerous, because fundamentals are better than accounted for and supply risks are significant,” Sternby said in an interview in London. “Even before the sanctions, the strength of consumer buying really stood out.”

Rusal Reliance

Rather than giving up control of the company, Deripaska is hoping lobbying by European governments will encourage the U.S. to ease the sanctions, which sparked an unprecedented rally in aluminum prices and exposed the global aluminum industry’s deep reliance on Rusal, the world’s largest supplier outside China.

“We as an industry have to think about how we resolve this problem where we can be squeezed so fast by a single source,” said Rob Van Gils, chief executive officer of Hammerer Aluminium Industries Holding Gmbh, which extrudes aluminum for automakers. The Treasury’s announcement on Monday gives the industry breathing room to find new sources of supply, as well as raising the prospect that they might be rolled back, analysts and consumers said at a conference held by CRU Group in London this week.

“The way I read the Treasury announcement was that this was the first step to reversing the sanctions, in light of the extreme difficulties they’ve generated for downstream companies,” Nicholas Snowdon, an analyst at Deutsche Bank AG, said by phone from London. “I don’t think it’s necessarily just a delay.”

Still, with Deripaska looking to hold onto power, the risk of further disruptions looms large, and buyers remain cautious. One lesson to be drawn so far is that the aluminum market doesn’t have much of a buffer against any sustained outages, Sternby said. “Stocks can be drawn down very quickly, and then consumers have to start scrambling for material.”

It’s not just the aluminum market that needs to be alert to supply risks, she said. Following Freeport-McMoRan Inc.’s warning that new environmental standards in Indonesia would make mining its massive Grasberg deposit unviable, copper supply is also looking shaky.

"With all the geopolitical risk that’s hit the market more broadly, I think that’s going to create reluctance to trade the market from the short side,” Sternby said.

©2018 Bloomberg L.P.

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