By Sohrab Darabshaw
Yesterday, our Stuart Burns took a look at the aluminum market and aluminum prices, including Australia’s move to ban exports of alumina to Russia.
Australia’s decision to halt exports of alumina to Russia is likely to further strangle Russia’s aluminum production. As such, it will add to an already desperate situation on the global aluminum supply front.
Australia ban’s impact on aluminum prices
Australia has banned the export of key raw materials to Russia, including alumina and bauxite. Russia gets about 20% of its total alumina supplies from Australia. So, with the new sanction, it has to look elsewhere to fill this new gap.
Canberra’s decision has several repercussions. Aluminum prices – both spot and futures – came under new pressure. It will also mean that exporters will now have to find new markets. The ban will add further pressure on an already strained supply chain. Even before the Russian invasion of Ukraine, Europe – especially western Europe – already faced an aluminum supply shortage, as soaring energy costs forced producers to curb output.
Russia is a major global exporter of commodities, including aluminum and steel. In 2021, it produced about 3.9 million metric tons of aluminum. That accounts for about 6% of global supply.
Filling in the gaps
If Russian production slows down because of the new sanctions by Australia, other players from India, Ireland and maybe even China could step in to fill the gap, say some experts. (We will get to the China aluminum story a little later.)
The Australian ban has brought some cheer to Indian aluminum producers. National Aluminium Company, Hindalco Industries (OTC:HNDNF), Bharat Aluminium Company and Vedanta Aluminium (VEDL), some of the top producers in India have, in the past, asserted they were more than up to the task of stepping up production to meet the demand crisis.
As such, the aforementioned companies see the new Australian ban as an opportunity.
The Australian sanctions may tighten the raw materials squeeze on Russian aluminum major Rusal. In 2018, for example, sanctions on Rusal International had sent prices up by as much as 30%. The move also prompted a search for new market players. The U.S. lifted the ban only after billionaire Oleg Deripaska agreed to reduce his ownership and give up control in Rusal.
Rusal’s 4 million tons per annum smelter processes about 8 million tons of alumina. Europe accounted for 41% of Rusal’s sales last year. Any further disruption to Russian shipments will only widen the region’s existing supply deficit.
Others could look to reduce Russia exposure
In 2021, Rusal’s domestic alumina plants accounted for about 37% of its smelter needs. Meanwhile, it imported the rest. In addition to Australia, Ukraine had also exported alumina to Rusal. That part of the supply, too, is now gone with Ukraine’s invasion.
The Australian government’s ban is also being seen as a call to other nations to follow suit on the alumina front.
However, this time, unlike in 2018, it does not affect Rusal directly. The ban is being seen as an “indirect sanction” on the company that dominates Russian aluminum production.
The top three seaborne alumina producers – Rio Tinto (OTCPK:RTPPF), Alcoa (AA) and Hydro (OTCQX:NHYDY) – have already said they would cut exposure to Russia. That means they may bear their guns on Rusal, too.
Meanwhile, this brings the focus to Rusal’s largest overseas alumina plant in Ireland. The Aughinish plant produced about 1.9 million tons last year.
Obviously, the Irish government may want the plant to continue. It does offer a partial solution to the ongoing aluminum shortage problem in Europe. The output that was meant for Russia can now be redirected to the starved European market.
Whether that will happen or not remains to be seen. The European Union is actively advocating increasing the sanctions on more and more commodities, including a ban on Russian steel imports.
The China story
Even before the invasion, stockpiled aluminum was shipped out of Chinese ports, with brokers anticipating massive alumina shortage. As such, they booked massive profits from this activity. Shanghai’s free-trade zone exported about 20,000 tons of aluminum ingot to European customers.
So, the question is: will China be able to step in to somewhat mitigate the aluminum supply crisis?
Most experts are not too hopeful.
The flow from China to Europe, which is not routine, may only bring short-term relief. China has historically produced more aluminum than it consumes. However, it is rare for China to export commodity-grade ingots. The main reason for this is that China has imposed a 15% duty on exports to stop domestic smelters from producing more than what China requires.
What’s more, China has been importing a significant amount of alumina of late for aluminum production. The raw material goes toward production across several major sectors, including defense, construction and automobiles.
As of now, things look bleak on the aluminum supply front, especially for Europe. Maybe, in the coming days, fresh suppliers may spring up.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.