Will Aluminium Be the Next to Suffer Price Chaos Following Nickel on Australian Ban on Alumina Exports?

SHANGHAI, Mar 22 - Which commodity will be the next to suffer price disruption after frenzying nickel? The answer could be aluminium.

With the Australian government announcing a ban on alumina and aluminium ore exports to Russia at the end of last week, the production operations of the world's second largest aluminium producer, Rusalink (00486.HK), will undoubtedly be severely affected and this will obviously overwhelm the supply side of aluminium, the most widely used industrial metal.

On Monday, while copper and tin prices have fallen and LME nickel futures once again pinned the fourth consecutive day of touching limit down, LME aluminium futures prices surged, rising 4.1% throughout the day to US$3,518/mt, and once up 5.7% during the day to the highest level since March 9 at US$3,574/mt.

Russian aluminium production threatened with serious impact under Australian alumina export ban

Aluminium prices rose on Sunday after Australian Prime Minister Scott Morrison announced the immediate implementation of the export ban, while Rusal shares fell sharply. Although the Australian government's ban does not explicitly mention UC Rusal, it is effectively a sanction against giants that dominate aluminium production in Russia, where Rusal is the only producer of aluminium.

Australia supplies nearly 20% of Russia's alumina (a key raw material for aluminium), and Australian bauxite exports to Russia, among others, are also on the ban list. As Russia becomes increasingly isolated from Western economies, Russian aluminium companies, which desperately need bauxite and alumina to feed their plants, will face disruptions to their supply chains.

In a statement, Rusal said it was assessing the impact of the ban. But the market has already reacted to the potential loss of Russian metal as a result of the ban.

RUSAL owns a 20% stake in Queensland Alumina Ltd. in Australia and is entitled to the same proportion of alumina production. Queensland Alumina Ltd. is operated by Rio Tinto. The company will likely continue to supply Rusal with the raw metal for now, unless the government directly prohibits it.

Rio Tinto has now said it will comply with all Australian government directives and reiterated that it is ending its business relationship with the Russian company. Sources close to the situation said earlier this month that Rio Tinto planned to stop supplying bauxite to Rusal's Aughinish plant in Ireland or buying alumina from the plant.

Last year, Rusal's domestic alumina plants produced supplied 37% of the giant’s demand for alumina, with the rest being imported and the two largest suppliers being Ukraine and Australia. Rusal has also previously cut the production at its alumina refinery in Nikolaev, Ukraine, due to the increased logistic tics and transport challenges posed by the conflict between Russia and Ukraine.

Prior to the announcement of this ban on the Australian side, Rusal had been spared direct sanctions from the West so far in this round of the Russia-Ukraine crisis due to the agreement with the US to lift sanctions in 2019. However, this situation may have now changed.

Rusal was founded by Oleg Deripaska, Russia's 'aluminium king', who owns shares in Rusal through his stake in En+ Group International PJSC, Rusal's majority shareholder. Deripaska was among the Russian oligarchs close to Russian President Vladimir Putin on whom the Australian government announced a new round of sanctions earlier this month.

Rusal's majority shareholder EN+ Group said earlier this month that it was considering spinning off Rusal's international operations to create a new company to operate and manage its alumina, bauxite and aluminium assets around the world in order to hedge against the impact of sanctions.

Consulting firm Wood Mackenzie said on Monday that the ban would undoubtedly further disrupt the supply chain and production of major aluminium producer - Rusal.

The whole body is involved: Aluminium market stocks are already tight

Russia is a major supplier of aluminium to markets such as Turkey, China and Japan, and this latest ban could undoubtedly put more inflationary pressure on the global economy. The reaction of aluminium prices to the Australian ban on Monday also showed how worried the market is about the potential loss of Russian metal production.

As the Australian Department of Foreign Affairs noted in its statement, aluminium is a key global resource across the automotive, aerospace, packaging, machinery and construction industries.

Indeed, supplies of this industrial metal, used to make everything from cans to aircraft to window frames, were already very tight even before the Russia-Ukraine conflict threw the commodities markets into chaos. If the West were to lose this 4 million tonnes of annual aluminium output from Rusal, it would probably present an even more serious challenge.

The aluminium supply chain has actually been overwhelmed for a long time. Restrictions on carbon emissionss have previously turned China, the world's largest aluminium producer, into a net importer of unprocessed aluminium to meet the demand of a gigantic domestic downstream products industry.

Production of European smelters has also been falling due to high energy prices, and the aluminium industry is power intensive. To fill the supply void, aluminium inventories have been steadily declining palpably in the past year or so. LME aluminium inventories now total 704,850 mt, the lowest level since 2007 and well below the some 2 million mt a year ago. Currently, cancelled warrants account for 34% of the total inventory, suggesting that more aluminium is likely to leave LME warehouses in the coming days.

The global aluminium market is in tight supply, particularly in Western Europe, both because of recent production cuts and its dependence on Russian supplies. Last year 41% of Russian aluminium sales was contributed by Europe and the disruption to Russian exports will only widen the existing supply gap in the region.

The complexity of Rusal's raw material supply network was exposed back in 2018, when US sanctions triggered a series of knock-on effects that spread to Ireland, Guinea and Australia and eventually led to European car companies lobbying the European Commission to mediate with the US.

This time, the impact has so far been gradual as sanctions have led to a reduction in supply, logistics and access to finance. However, the Australian government's move to add alumina to the sanctions list marks a significant escalation in this dynamic.

For the Russian aluminium industry and the global aluminium market, the next key may be: whether other countries will follow suit.