A string of US-led political actions are roiling the world’s aluminum market and supply chain. Most notably, a few Trump tweets have US aluminum producers in free fall. Check out the Dow Jones U.S. Aluminum Index (DJUSAL) today:
Dow Jones U.S. Aluminum Index – 1 Month Chart
Tariffs on Chinese steel and aluminum gave way to sanctions on numerous Russian businesses. One of the most prominent people affected by the recent sanctions is Oleg Deripaska. He is the man behind Russian aluminum giant Rusal. Trump has made it clear that if Deripaska divests his position in Rusal, the U.S. will drop aluminum tariffs on Russia. Aluminum prices have been in free fall as the market prices in the additional supply.
Any operation that Mr. Deripaska has an interest in is subject to strict sanctions, which has turned the complex aluminum market on its head. Rusal is the second largest aluminum producer next to China. They have a web of complex relationships within the aluminum industry.
In the wake of the sanctions that were imposed a little over a week ago, tectonic shifts in the global aluminum trade are manifesting. Industry leading companies, including Alcoa (AA), Century Aluminum (CENX) and Kaiser Aluminum (KALU) are all in the midst of multi-day declines. Alcoa was down more than 12% Monday morning – a striking collapse given its approximate USD 11 billion market cap.
Massive Aluminum Rally Masks Complex Market
The word perspective comes into view at times like these. Trump’s recent tweets and tariffs could be seen as a blessing or curse.
The Japanese have scrambled to secure supplies of aluminum in the wake of the Russian sanctions. Despite access to lower cost Chinese aluminum, Japanese manufactures need to replace specialized Russian aluminum feedstock.
Major aluminum manufactures like Rio Tinto appear to be in a great position. However, Rio Tinto has some shared operations with Rusal, as well as supply agreements for some aluminum products. Its shares were off 1.5% Monday morning.
Both Rio and Glencore have declared force majeure on some aluminum contracts, with the cited cause recent sanctions. Rio released a public statement outlining the situation it is facing in the aluminum market. They estimate their yearly output of the metal will fall slightly due to the ongoing political turbulence.
Due to the increasing level of supply uncertainty, aluminum stocks held in the LME warehouse system are evaporating. According to Financial Times, as much as one-third of the current stocks are set to leave LME warehouses.
Industry appears to be rushing to lock down any physical supply that is free of political encumbrance. The price of aluminum in the west has also shot up. At the time of writing the cash contract on the LME is trading at USD 2461/tonne. Aluminum has not traded at this level since at least 2011. The price of aluminum per pound has shot up from below 90 cents to near $1.20 in recent weeks.
Wider Ramifications for Global Aluminum Market
Unfortunately for Rusal, some of their smelting operations risk permanent damage if they are shut down.
According to unofficial reports from inside the company, the stockpiling of excess aluminum is ongoing at their Sayanogorsk facility in Siberia. The stored aluminum is reported to be enough to fill five train cars on a daily basis. Soon after the sanctions were imposed ranking officials from Rusal met with Chinese investors.
China is the world’s largest producer of aluminum, and is also being affected by the tariffs that President Trump imposed earlier this year. Striking a deal with Chinese businesses for excess aluminum may prove difficult, but they may be willing to extend financing to the struggling Russian company.
Europe Fierce Critic of Aluminum Sanctions Against Russia
Many of the nations that comprise the E.U. have voiced their concerns over the damage these new sanctions will do. French officials have noted that if these sanctions persist, there could be permanent damage done to the global industrial base. This is what America First looks like.
German trade officials met with industry leaders over the past week, to discuss the disastrous consequences from this latest round of political measures against Russian industry. Many feel that the result of these sanctions are not being thought about by the USA, who would have the ability to retaliate against European firms that don’t abide by them.
Major infrastructure projects like the Nordstream 2 pipeline are currently in a state of limbo, which puts German-Russian relations at risk. The pipeline would simplify gas supplies in Western Europe, and has the support of both Germany and France.
In the short term, materials companies like Rio Tinto, Glencore and South 32 will probably benefit from the steep rise in aluminum prices. However, the medium term may not be positive for resource producers.
The effects from these fresh sanctions are difficult to gauge, as the damage to manufactures may impact demand for basic materials as time goes on. Finally, on the aluminum market and for aluminum producers all eyes will be on the Deripaska and Rusal. If he divests his position, look for aluminum prices to fall and producers to rally.