Aluminium markets: sanctions threaten supply reliability
Discussions about USA’s punitive tariffs on aluminium and steel imports as well as the sanctions against Russian companies as the Russian aluminium group Rusal have caused an uproar on global metal markets. Since the USA announced the sanctions in the beginning of April, aluminium prices at Western metal exchanges have risen and concerns about potential supply bottlenecks for the aluminium market are increasing.
Currently, American companies not only have to not supply any material to the Russian group, they are also not allowed to buy from it. “Conditions on the market are currently blurred. We certainly cannot foresee how the situation will develop in Europe,” say buyers from Germany commenting on the chaotic climate at present. All manufacturers are “on the hunt” for materials, buying around the globe so as to keep their own production lines for primary aluminium in operation.
The price of alumina has soared by 26% since early April
This impacts aluminium prices which have only known one direction for weeks now – up – reaching a six-year high. Furthermore, the share prices of US aluminium producers such as Alcoa are rising. At the London Metal Exchange LME the price per ton of primary aluminium has exceeded the US$ 2,500 mark. Now standing at US$ 2,537 it is far above the recent five-year high of US$ 2,290.50 per ton of primary aluminium in December 2017. The price of alumina has soared by 26% since early April and is approaching its 2006 record high.
Alcoa is the biggest US aluminium group and has earned slightly less in the first quarter of 2018 than in the same period last year. Despite this 3% dip their share price was up by 4.1% immediately after the announcement of the quarterly figures. The upward trend was propped up even further by the fact that Alcoa revised the forecast for the current fiscal year upwards. For 2018 Alcoa now expects a global shortage of both aluminium and alumina and therefore prices to skyrocket accordingly. In 2017 the US group had still expected a balanced aluminium market for 2018 – now the augurs in Pittsburgh forecast a global shortage of over one million tons.
After all, the Rusal group affected by these sanctions is not only a major aluminium supplier but also closely associated with other – western – partners across the entire supply chain from raw materials sourcing to smelting operations. Rio Tinto, for example, the big Australian-British raw materials group, has so far produced alumina predominantly in a joint venture with Rusal. It is true that Rusal only owns 20% of the big alumina refinery in Queensland while Rio Tinto holds 80% of the shares but the resulting relations between the two groups are far closer. Due to the sanctions Rio Tinto was compelled to declare force majeure. This also includes a discontinuance of bauxite supplies, that Rio Tinto had used to supply the Aughinish Refinery in Limerick, Ireland, sold to Rusal several years ago.
Aughinish is an aluminium oxide factory 100% owned by Rusal – this means the company is entirely affected by sanctions. The factory is the biggest European producer of alumina supplying, in particular, European primary melting plants with the raw material aluminium oxide, which is required for in-house primary aluminium production in Europe. This is why the factory is indispensable to the aluminium-oxide supply for the European market. Should Aughinish no longer be able to deliver alumina in the short or medium term there is a risk of production losses, plant closures as well as costly re-commissioning, which takes months. On top of this, the entire material supply chain in Europe depending on these material supplies, is at risk.
Risk of supply and delivery bottlenecks for raw aluminium and aluminium oxide
German aluminium producers fear that these sanctions will also cause substantial market shifts in Germany, which might affect the entire supply chain. There is a risk of supply and delivery bottlenecks for raw aluminium and/or aluminium oxide and price increases, says the Berlin-based metal industry association “Wirtschaftsvereinigung Metalle” (WVMetalle). 2017 saw 744,853 tons of raw (non-alloyed) aluminium being imported to Germany. Of this, 233,267 tons came from Russia. This means that 31% of all the raw aluminium imported to Germany in 2017 came from Russia and a major part of it from Rusal. At the European level supply relations with Russia are also intense. With just under 1.6 m tons of raw aluminium Russia is the EU’s biggest importer.
WVMetalle expects the sanctions to heavily impact the trading flows between Germany/Europe and Russia. The EU, they say, is a net importer of raw aluminium and alumina. The sanctions might entail market shifts for all market players and could be felt across the entire supply chain. This means that major consumer industries such as the automotive field could also be affected, says WVMetalle. The Association fears that supply reliability and calculable prices can no longer be ensured – at the expense of companies’ competitiveness versus non-European suppliers like China, India or the Gulf States.
In view of the current political developments the supply of markets with aluminium will become more insecure in 2018. The production capacities existing worldwide can satisfy global aluminium demand but the alumina volumes missing in future will be hard and expensive to replace. After all, even Norsk Hydro, so far one of the largest aluminium, bauxite and alumina suppliers in the world, had to declare force majeure. Alunorte, one of the world’s biggest alumina refineries, can now only work at 50% capacity – just like Norsk Hydro’s Brazilian aluminium smelting operation. All in all, the prospects for market supply are not as good as they used to be. At the end of the day, processors and consumer industries like the automotive, construction or packaging industries will have to pay the higher prices – which is neither in the interest of aluminium producers nor customers.