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Concerns over the possibility of fresh trading sanctions rose on October 12, on news reports that the United States was considering a ban on Russian aluminium.
A possible ban was one of three options being considered by the White House, reports said, with the others being an increase in tariffs or sanctioning Russian aluminium producer Rusal directly.
“It just adds to the uncertainty that was already [there],” one market participant said. “There is no clarity about what is going to happen, and that can make the market nervous. There are a lot of headlines but not a lot of facts.”
Wednesday’s news came after the London Metal Exchange announced on October 6 that it had launched a discussion paper asking for market feedback on the acceptability of Russian metal brands on the exchange.
“While it remains uncertain whether the US will move forward with sanctions to target Russian aluminium, we would expect the effect (if sanctions are implemented) to be short-lived for LME prices, given that the US could find alternative trading partners to fill the gap, such as China,” Natalie Scott-Gray, senior metals analyst at StoneX, said on Thursday.
More problems will be created, she added, “if the LME (or Europe) follow suit, given not only Europe’s much higher reliance on Russian aluminium than that of the US (13% versus 6%), but more limited alternative supply sources.”
The European aluminium market has seen a number of smelter output cuts over the past year, due to high energy prices. Market participants said that this drop in production made the region a net importer, and any ban on the use of Russian aluminium could escalate the situation.
“It makes no sense now to be selling below the current levels, because we don’t know what could happen next,” one European trader said.
“Not only is European production significantly lower, but traders are also running leaner books,” a second trader added.
“There are some very big events going on in the macro world which create volatility and uncertainty regarding the future. People don’t want to take too much risk. If the LME [three-month aluminium contract] can increase by 7% in a day following one headline, how do you cope with the volatility when you’re running a big book? It leaves the market in a [vulnerable] position to big swings in either direction,” he said.
LME warehouse stocks of aluminium remained at historically low levels despite a number of recent inflows. Global inventory levels were most recently at 351,900 tonnes, with only 4% of total stocks sitting in European warehouses, and market participants noting the increased reliance on Asian imports.
But other market participants said that, while supply concerns have been heightened by the latest news, weak nearby demand continued to outweigh the headline risk. Consumers were reported to be well-stocked and some were reducing demand by more than 30% in the next quarter.
Market participants said that a number of producers have offered large amounts of unsold tonnages of primary aluminium to the spot market in recent weeks.
“The difference is that, in 2018, demand was okay and then we were hit with these sanctions, and everyone panicked. But the demand needs to be taken into account here,” a third trader said.
“There were a lot of spare tonnes being offered this week and last week,” he added. “If the demand is not there to pick up those units, then this situation might not cause as huge a reaction.”
European premiums have moved lower in recent weeks following weak demand and negative economic sentiment.
Fastmarkets assessed the daily aluminium P1020A premium, in-whs dup Rotterdam, at $230-250 per tonne on October 13, compared with $240-265 per tonne a week earlier and falling by more than 36% since the beginning of September.
The premium was now at its lowest level since December 7 and was down by 52% from its peak of $500-510 per tonne in May.
Duty-paid premiums have also moved lower on weaker European consumption and a number of aggressive offers, with the market approaching the year-end.
Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam, at $315-345 per tonne on October 11, unchanged from last Friday’s assessment but 27% lower than $430-480 per tonne at the beginning of September.
“The market is betting on a hard recession in Europe and, on average, my consumers are losing around 20-30% of their demand for the next three months,” a fourth trader said. “The panorama hasn’t changed for the next few weeks or months. If there is any buying interest, you’ll still get sellers jumping on it, but the main supply-side questions are for 2023.”
For aluminium market participants, there was a concern about history repeating.
In April 2018, the United States Office of Foreign Assets Control (OFAC) sanctioned Oleg Deripiska.
Deripaska officially resigned as director of Russian aluminium producer Rusal on May 25 that year. The US sanctions against Rusal were removed in 2019.
The news at the time sent aluminium prices and premiums soaring, with market participants concerned about extreme supply tightness.
Fastmarkets’ aluminium P1020A premium, in-whs dup Rotterdam, rose by 20.5% in one day to $125-140 per tonne on April 13, 2018, from $105-115 per tonne on April 12.
On the futures market, the LME three-month aluminium price climbed to a six-year high of $2,340 per tonne after the 2018 Rusal sanction news.
In comparison, current LME aluminium prices have already risen above that level this week, with the three-month price hitting a high of $2,395 per tonne on October 13.
The LME’s notice to the market on October 6 acknowledged that Russian material continues to flow in and out of warehouses, but market participants have been considering what the potential US decision could mean for the exchange.
“Through 2022, the LME’s understanding is that consumers have broadly been willing to take deliveries of Russian metal,” the October 6 notice said. “However, as the current negotiation period for 2023 supply agreements progresses, the LME understands that an increasing number of consumers may be expressing an unwillingness to accept Russian metal in 2023.”
Conversely, data released by the LME showed that the percentage of live tonnage of Russian brands of aluminium had not exceeded 20% in the past six months.
Aluminium producer Rusal said on October 5 that its “sales book is solid, and the company has no need to deliver metal to LME warehouses.”
“The more important question,” ED&F Man’s Ed Meir said on Thursday, “is what will happen to Russian aluminium units if, in a worst-case scenario, they get turned away from the US and perhaps by the EU and the LME as well? This [would] no doubt be a major problem for Rusal, but not necessarily a death sentence for the company.”