Aluminum Market May See Some More Tumult as Rusal Sanctions End

(Bloomberg) -- With the end of U.S. sanctions on aluminum giant United Co. Rusal in sight, a key question for the industry is what will happen to all the metal that the company has produced since the saga began in April.

Lifting sanctions on Russian billionaire Oleg Deripaska’s company -- which should happen in 30 days unless blocked by Congress -- would allow aluminum traders to finally move past an issue that’s dogged the market for much of the year. Still, there could be some further turbulence as Rusal’s metal starts to flow freely back into global markets.

There’s thought to be about 300,000 tons of metal produced by Rusal since the sanctions were announced sitting in private storage, mostly held in Europe by large traders, according to Citigroup Inc. That’s equal to about a quarter of the London Metal Exchange’s stockpile. Removing the sanctions would allow traders to once again deliver that metal into the LME’s warehouses.

The question is whether doing that will prove more attractive than selling aluminum to end users at a time when demand is sagging.

“It’s all about keeping an eye on the physical markets, because if metal starts being delivered while the fundamentals are weak, the impact would be pretty bad,” Citigroup analyst Oliver Nugent said. “But if anything, that gives large traders more of a rationale to hold on to the material and wait for better times.”

How much metal ends up on the LME also depends on factors such as warehouse incentives and the profitability of financing metal in long-term storage deals, he said.

Aluminum Market May See Some More Tumult as Rusal Sanctions End

Read more: Aluminum hits 16-month low as U.S. plans to lift Rusal sanctions

There could be ructions in the market for the raw materials and value-added products that Rusal produces too. Physical premiums paid by U.S. consumers spiked when the sanctions were first announced, and may be pressured if large amounts start to arrive again, Nugent said.

Traders should also brace for some volatility in alumina, which is needed to make aluminum, with Rusal operating several refineries of the raw material. Alumina prices spiked to a record earlier this year, and will probably fall to about $350 a ton by the first quarter from $400 currently, said Jorge Vazquez, managing director of Harbor Intelligence.

Aluminum Market May See Some More Tumult as Rusal Sanctions End
Winners and losers?
  • China’s producers had been among those to benefit from the alumina tightness, with its exports rocketing to a record in October on sales to the aluminum-making hub of Iceland.
  • Shares of top U.S. producer Alcoa Corp. fell Wednesday as the prospect of more alumina coming back into the market offset gains the company was receiving from its profitable raw-materials output.
  • Century Aluminum Co., the No. 2 U.S. producer, may benefit from cheaper alumina prices as it doesn’t produce its own stock of the material, according to Gabelli & Co.

“The effect of lifting the sanctions will be to ease the alumina market, and since Alcoa derives more value from that market, I think it will probably be a net negative for them,” Gabelli’s Justin Bergner said. “They benefited from the Rusal shutdown, while a company like Century that was short alumina got hurt by it.”

In terms of aluminum prices, resolving the Rusal saga will allow traders to focus more on the outlook for China at a time when the market is under pressure. Prices and premiums retreated in recent months, partly as the U.S. delayed imposing the harshest parts of the sanctions and on expectations that the measures would be softened or lifted.

Goldman Sachs Group Inc. earlier this month cut its 2019 forecasts for Chinese prices by 9 percent and said demand in the top consumer won’t grow. Others, including consultancy CRU Group, point to supply falling well short of demand globally next year even with the Rusal threat receding.

“If you look at raw-material costs, which are pretty high, continued deficits, including in China and ex-China, it doesn’t signal lower prices, even with Rusal being resolved,’’ said Doug Hilderhoff, CRU’s senior aluminum analyst in North America. “Because of the way the extensions kept coming and the ability for people to actually negotiate and settle on 2019 contracts with Rusal, I think the market was already counting on it.’’

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