Rusal shuts down Ukraine alumina plant supply disturbance continues to push up aluminum price [agency review]

Event: on March 1, Rusal announced on the Hong Kong Stock Exchange that production at the Nikolaev alumina refinery in the Nikolaev region of Ukraine had to be temporarily closed due to inevitable logistics and traffic challenges in the Black Sea and surrounding areas. The company said that it would not immediately have a broader impact on aluminum production in the relevant aluminum smelters of the group and would take all necessary measures to ensure the continuity of the business.

Comments:

Raw material: the closure of the alumina plant will disturb Rusal's electrolytic aluminum production. According to SMM statistics, Rusal's Nikolaev refinery in Ukraine has a capacity of 1.7 million tons / year. Ukraine's Nikolaev alumina refinery is Rusal's second largest alumina refinery (Ireland's Aughinish refinery has a capacity of 2 million tons / year), contributing 21.5% of Rusal's 7.86 million tons of alumina production in 2019. The closure of the alumina plant may cause a shortage of raw materials for Rusal's electrolytic aluminum production.

Supply: if Europe and the United States impose sanctions on Russian aluminum, or short-term disturb the global electrolytic aluminum supply. Recently, Europe and the United States have stepped up sanctions against Russia, including shutting down the SWFIT settlement functions of some of their banks, raising concerns about sanctions against Rusal. Rusal produced 3.74 million tons of electrolytic aluminum in 2021, accounting for about 5.6% of the global output. If Europe and the United States impose sanctions on Russian aluminum, it will have an impact on the short-term supply of electrolytic aluminum overseas.

Energy: natural gas prices are soaring and European aluminum companies are still likely to cut production. Since 2021Q4, many European aluminum smelters have cut production due to the high cost of electricity caused by the rising price of natural gas. According to SMM statistics, by the end of January 2022, the production capacity of electrolytic aluminum stopped in Europe has exceeded 800,000 tons per year, accounting for about 1% of the global electrolytic aluminum production capacity. Russia accounts for 39% of the EU's total natural gas imports in the first half of 2019, and the conflict between Russia and Ukraine and sanctions imposed on Russia by Europe and the United States will exacerbate expectations of market disruption to European gas supplies. UK IPE natural gas futures prices rose 408 per cent from 59p / som at the beginning of 2021 to 300p / som on March 1, 2022. If natural gas prices remain high, European aluminum companies may cut production further.

Inventory: overseas inventory is still at an all-time low, and China is about to enter the destocking cycle. As of March 1, LME aluminum stocks had fallen to 814000 tons, down 9750 tons from February 28 and an all-time low. As of February 28, the national spot inventory of electrolytic aluminum was 1.117 million tons, which was 390000 tons higher than that before the Spring Festival (140000 tons during the Spring Festival and 250000 tons after the festival), which was lower than that in previous years. We believe that the March domestic downstream demand season is approaching, real estate completion and other areas of demand is expected to improve, the domestic depot cycle is coming.

There is still a gap between domestic aluminum supply and demand, and continue to be optimistic about the upward price of electrolytic aluminum. The supply or storage disturbance of Russian aluminum and the suspension of production by aluminum enterprises brought about by high electricity costs in Europe may continue to affect the overseas electrolytic aluminum supply. Fundamentals are still the determinant of domestic aluminum prices, and it is optimistic that downstream construction will gradually resume after March. Under the background of low global inventory, the disturbance of foreign supply will continue to push the price of electrolytic aluminum up, and the profit per ton of aluminum will continue to rise. Continue to recommend China Hongqiao, Shenhuo Co., Ltd., Nanshan Aluminum Co., Ltd.

Risk hint: the risk of electricity price policy adjustment; the excessive increase of aluminum price suppresses the downstream demand risk; the growth of waste aluminum recycling is higher than expected.