The US and the UK launched a new round of sanctions against Russian aluminum, which may have an impact on the global aluminum market

On April 13, the US and the UK announced new trading restrictions on Russian aluminum, copper and nickel. The new rules prohibit the London Metal Exchange (LME) and the Chicago Mercantile Exchange (CME) from accepting newly produced Russian metals, including Russian aluminum, copper and nickel produced on or after April 13. LME also issued trading guidelines for Russian metals after being sanctioned by the UK. The two countries also banned the import of the three metals from Russia. At the morning session on April 15, domestic and overseas aluminum prices rose rapidly, with three-month LME aluminum jumping to $2,728/mt, a record high. The most-traded SHFE 2306 contract also climbed to a high of 21,345 yuan/mt. This incident has attracted great attention from the market. Will it continue to have an impact on the global aluminum market?

Since the Ukraine-Russia war, Russian aluminum has been sanctioned by Europe and the US. The trade flow of Russal has undergone major adjustments, and the market focus of enterprises have also been adjusted. The sanctions from the UK and the US have not yet affected the production.

Russia is one of the important producers of aluminum metal in the world. According to SMM data, Russia's total aluminum production in 2023 was 4.062 million mt, accounting for about 5.6% of the global total supply, and its output ranked third in the world. Russia's aluminum metal is mainly used for exports. Rusal is Russia's largest aluminum smelting supplier, its largest sales destination is Asia, accounting for 38.4% in 2023, followed by CIS countries (31.9%) and Europe (27.8%). Sales in the Americas account for only 1.4%. As such, the stability of Russia's aluminum production affects the global aluminum market supply. The sanctions against Russian aluminum caused concerns on market supply.

First, overseas deliverable metals will be re-arranged. It takes time for non-Russian metals to fill Russian metal warrants, meaning the deliverable volume will become tight. This will lead to intensified volatility in LME aluminum prices and increasing risks. As of the end of March, Russian aluminum warrants accounted for 91% of total open interest.

Secondly, it will the boost China's aluminum semis exports. The current LME aluminium prices far outperform SHFE aluminium prices, while domestic spot prices have little upward momentum, expanding spot discounts. This will boost exports, and after overseas Rusal transactions were restricted, the restricted regions will import aluminum from China. The increase in export profits and the altered trade flows of overseas aluminium semis supply and demand are both beneficial to exports.

We believe that it will somehow stimulate more Rusal to flow into China, but other unrestricted regions also have a certain ability to absorb Rusal. Based on domestic and foreign prices, these regions may even be more attractive than the Chinese domestic market.