Sanctions on Russian Aluminum Could Stir Global Supply Chains Again

Aluminum is, as things stand, the latest victim of global economic woes as prices fall due to alleged dumping of Russian aluminum, weakening global demand, and significant increases in operational costs. Earlier this week, aluminum stocks in the warehouses of the London Metal Exchange (LME) surged, raising concerns about potential dumping of aluminum of Russian origin.

The White House is already considering a ban on imports of aluminum from the Russian producer Rusal, and unsold metal often ends up in the LME’s storage system, that is, in warehouses authorized by the exchange for storing metal registered on the LME.

– It has been very disappointing for the struggling aluminum market to see a sort of double whammy from weakening global demand, especially in China, but also Russia which is flooding aluminum onto the global market – said mining and metals analyst from Wolfe Research Timna Tanners for CNBC’s ‘Squawk Box Asia’.

Analysts Surprised by Losses

The next quarter does not bode well, unless something is done to stop the potential dumping of metal originating from Russia and to increase Chinese demand, both in infrastructure development and real estate construction.

So far, there are not enough signs that Chinese demand could improve quickly given that President Xi Jinping signaled at a Communist Party meeting in Beijing that China would stick to its zero-Covid policy, Tanner added. The situation is further exacerbated by declining demand elsewhere as interest rates rise.

Aluminum producers such as American Alcoa and many in Europe are also facing higher operational costs, mainly due to rising electricity prices.

– Energy accounts for about 30 percent of total costs for an aluminum smelter so they have been absolutely pressured in some European operations – said Tanners.

CFRA Research analyst Matthew Miller was also surprised by Alcoa’s recent loss in the third quarter, which the company attributed to lower aluminum prices and higher energy and key raw material costs. Like Tanners, Miller indicated that ‘things could get worse in the fourth quarter before they get better’.

Rising Stocks Are Not a Good Sign

Although the LME does not disclose where aluminum is sourced from when stocks rise, the increase in global stocks is a bad sign given that base metal prices have already been affected by recessionary concerns, believes Vivek Dhar, CBA analyst for mining and energy commodities.

Any influx of Russian aluminum into LME warehouses also presents a more complex problem, Dhar wrote in a note.

– The price on the LME could trade at a discount to the fundamentals if the exchange becomes a dumping ground for Russian metal – he said, adding that Russia accounts for about 17 percent of global aluminum production.

– The LME is very aware of the problem – says Dhar.

And if the U.S. moves forward with sanctions against the Russian producer Rusal, it could have consequences for global aluminum supply chains, said ING’s economic commodity strategist Ewa Manthey in a recent note to CNBC.

Manthey noted that this was seen in 2018 when the U.S. Treasury last imposed sanctions on Russian billionaire Oleg Deripaska and companies he owns, including Rusal.

It is worth noting that Rusal is not only a major producer of primary aluminum but is also embedded in the global supply chains necessary for the production of metals, bauxite, and alumina.

– Rusal’s sanctions from 2018 affected operations in Guinea and Jamaica, while smelters in Europe struggled to secure raw material supplies – said Manthey.

European Aluminum Giants Call for Sanctions

Norsk Hydro ASA, the company that operates the largest primary aluminum plant in Europe, is calling for sanctions on Russian metals as European producers cut production to cope with sharply rising energy costs.

– We see that European aluminum is really suffering from the war. There is a paradox that many producers have self-sanctioned regarding Russian metal, while there are others who buy Russian metal and profit in many ways from the war – said the company’s CEO Hilde Merete Aasheim in a recent interview with Bloomberg TV.

It is worth noting that Russian aluminum is currently not sanctioned in the U.S. and across Europe, although several European buyers refuse to purchase. Norsk Hydro will not accept any new Russian metal, while Novelis Inc. has excluded Russian production from a key tender for new contracts to supply its European plants next year.

Norsk Hydro, which also controls the world’s largest alumina refinery in Brazil, decided last month to cut production at two smelters in Norway in response to reduced market demand, and in August stated that it would close the Slovalco aluminum production facility in Slovakia, Bloomberg reports.