What has happened to the global aluminum market since the conflict between Russia and Ukraine? [institutional Research report]

0. As the situation advances, the incident stimulates aluminum prices to rise.

Since February 2022, the full outbreak of the conflict between Russia and Ukraine has stimulated aluminum prices to accelerate upward. Lun Aluminum continues to hit record highs, even jumping to more than $4000 / ton at one point, and Shanghai Aluminum has returned to a high of 24000 yuan / ton. as a result, the market is worried about the cost and supply of electrolytic aluminum in the context of the intensification of the conflict between Russia and Ukraine.

The crisis between Russia and Ukraine began in March 2021 and escalated into an all-out war on February 24, 2022. The starting point from which it has a greater impact on aluminum prices should be calculated from the end of last year. In the second half of 21, energy costs in Europe soared, and a number of electrolytic aluminum enterprises announced production cuts at the end of 21 years, resulting in a shortage of overseas spot aluminum ingots; the conflict between Russia and Ukraine escalated after the Spring Festival in 22 years, as the war broke out in Europe and the United States announced that Russia would be removed from the SWIFT system, the market repeated the 18-year Russian aluminum sanctions incident.

1. The energy is strong, the cost test is severe.

Since the full-scale war between Russia and Ukraine in late February, European electricity prices have experienced a thrilling rise, although the subsequent decline, but the overall focus is still maintained at an extremely high level relative to previous years. As a result, aluminum smelters in Europe face a big test from the cost side, especially those that fail to sign long-term power agreements.

From a regional point of view, the average electricity price in France in the first quarter was about 241EUR/MWh, an increase of 3% month-on-month and 341% over the same period last year; the average electricity price in Spain was about 236EUR/MWh in the first quarter, an increase of 8% month-on-month and 387% over the same period last year; and the average electricity price in the Czech Republic and Slovakia was about 229EUR/MWh in the first quarter, an increase of 17% month-on-month and 309% over the same period last year. Assuming that the smelting energy consumption in the EU region is 14000KWh/t, the theoretical cost of the smelter in the first quarter of 22 years has increased by about US $300 / ton month-on-month and nearly US $3000 / ton compared with the same period last year. The spot price of LME aluminum is less than $4000 a tonne, which explains why there were concentrated production cuts in European aluminum mills between December 21 and early 22. At the same time, we can also speculate that in the context of huge cost increases, aluminum plants that can maintain normal production are less exposed to electricity costs, and even if electricity continues to soar in the future, they are less likely to join production cuts. In Europe, due to the high degree of marketization of electricity trading, the fluctuation of energy prices is transmitted smoothly to electricity prices, and natural gas and coal still account for nearly 35% of the power structure, so the rapid rise in electricity prices is closely related to the surge in energy prices. Since the third quarter of 21, the price of fossil energy in Europe has been exaggerated. Based on the price of July 1, 2021, TTF natural gas prices surged more than sixfold in early March 22, ARA thermal coal prices nearly tripled, and Brrent crude oil rose about 70 per cent. Since last year, the European region has really experienced an energy crisis, which is actually the result of a combination of adverse factors. At first, wind power in the North Sea fell off the chain, then a large number of nuclear reactors in France shut down, against the backdrop of a sudden increase in demand for natural gas, the second largest source of power generation in Europe, but low inventories. The Nord Stream II project, which could have saved Europe from fire and water, has experienced repeated obstacles to final bankruptcy because of the escalating conflict between Russia and Ukraine. The various sources of power generation are weak, and the price of electricity naturally soars.

In fact, the current European energy landscape is facing an important turning point, and natural gas prices are expected to be difficult to return to previous levels. The conflict between Russia and Ukraine can be said to be a dispute between the United States and Russia arranged in Europe. The origin and outbreak of this war reflect not only the conflict of interest in the energy export of the United States and Russia, but also the swords and swords of the United States, Russia and Europe in the economic and political fields such as energy pricing, monetary system, hegemony and so on. The European region is short of energy reserves and highly dependent on Russian energy. According to Eurostat data, 41 per cent of natural gas, 27 per cent of oil and 47 per cent of thermal coal in the EU need to be imported from Russia for 20 years. European energy supply is worrying in the short term in the context of the conflict between Russia and Ukraine. Since the third quarter of 21, Russia's natural gas flow to Europe has decreased significantly, and recently, many European countries have also indicated that they will take the initiative to reduce their dependence on Russian natural gas, so no matter what the future trend of the situation in Russia and Ukraine is, I am afraid that the supply pattern of natural gas in Europe will change, as a result, it will be difficult for natural gas prices to return to low levels, and electrolytic aluminum enterprises will face a severe cost test. The ability to effectively manage the risk of power cost is very important to maintain its normal operation.

two。 Conflict intensifies and fears of sanctions increase

With the outbreak of the conflict between Russia and Ukraine, the market began to worry about restrictions on Russian aluminum exports, which in turn had an impact on the global aluminum supply chain. With some Russian banks banned from using the SWIFT system, there are growing concerns about whether the sanctions will involve Rusal. Russia, the world's largest aluminium producer after China (sometimes slightly behind India), produces primary aluminum from Rusal (Rusal). According to Rusal's quarterly report, the company's annual output of primary aluminum in 21 years was 3.763 million tons, accounting for about 5.7% of the world, of which 3.639 million tons were produced by an aluminum smelter in Russia and the remaining 124000 tons were produced by a smelter in Sweden.

Due to the current tight global supply of primary aluminum and the fact that US sanctions on Russian aluminum over the past 18 years have hurt the enemy by 1000 self-damage, from a rational point of view, we believe that the possibility of Russian aluminum being subject to comprehensive sanctions is relatively low (this possibility is further reduced with the signing of the Russian-Ukrainian peace agreement). However, just as the Russian invasion is unexpected, this possibility cannot be completely ruled out. If Rusal is really sanctioned, it will undoubtedly worsen the already fragile supply of aluminum ingots in Europe in the short term. According to Euroaluminium statistics, the primary aluminum supply in the EU is divided into primary aluminum production, recycled aluminum recovery and import, with net imports accounting for nearly 50% of the total supply. Un Comtrade data show that the European Union is highly dependent on Russian electrolytic aluminum imports. Although this proportion has been declining in recent years, about 21% of EU aluminum ingots imported in the past 21 years still come from Russia.

In fact, according to overseas consultants, although the ostensible sanctions have not yet covered Russian aluminum exports, some buyers have asked not to import goods from Russia, others have decided not to sign new contracts with their Russian counterparts, and major shipping companies such as Maersk and MSC have stopped shipping from Russian ports. Although LME spot / three-month rising water gradually fell back after rising to more than 45 US dollars / tonne at the end of February, it did not represent a rapid relief in the spot market, mainly because the market traded in advance the impact of the conflict between Russia and Ukraine on global primary aluminum supply. The overseas spot premium verifies that the supply of aluminum ingots in the European and American markets is still tight. The spot water in the Midwest of the United States has risen by more than 800 US dollars / ton, while the spot water in Europe has reached nearly 600 US dollars / ton, and may rise further.

With the continuous progress of the conflict between Russia and Ukraine, the scope of European and American sanctions against Russia is also expanding, and has involved alumina and bauxite in the upper reaches of electrolytic aluminum. On March 1, Rusal announced that it would temporarily shut down production at its alumina refinery in Ukraine due to inevitable logistics and transportation challenges in the Black Sea and surrounding areas. On March 20, Australia banned the export of bauxite and alumina to Russia as sanctions against Moscow. According to Rusal's annual report, its electrolytic aluminum production capacity in Russia is about 3.6 million tons / year, which requires about 7 million tons / year of alumina raw material supply, while its alumina production capacity in Russia is only about 3 million tons / year. Therefore, it is speculated that Rusal needs to import alumina as a supply. According to UN Comtrade data, Russian imports of alumina from Australia and Ukraine are about 1.4 million tons / year and 1.7 million tons / year respectively, so it is inferred that some events will cause a shortfall of about 3 million tons of alumina raw materials for Russian aluminum local production. As Russian shipping is also restricted, it is speculated that it is difficult to find a way to fill this gap in the short term. In addition, Rusal produced 8.305 million tons of alumina in 21 years. In addition to its production in Russia and Ukraine, its plant in Ireland (accounting for about 23% of the total output) is also at risk of sanctions. The plant is the largest alumina plant in Europe, with a capacity of nearly 2 million tons / year. It exports products to France, Iceland, the United Kingdom and other countries. If the trade is completely cut off, it will have a wide impact. By contrast, Rusal's plants in Jamaica and Guinea, which together account for 10 per cent of total production, are relatively "safe".

The impact on the mining side is relatively limited, mainly due to the small production of bauxite in Russia and the small volume of import and export trade. According to the US Geological Survey, Russian bauxite production in 21 years was 6.2 million tons, less than 2 per cent of global bauxite production. In addition, according to UN Comtrade statistics, Russia was a net importer of bauxite in 20 years, with imports of about 14000 tons, mainly from countries such as China (72 per cent), Turkey (12 per cent) and Ukraine (8 per cent). Exports are about 314 tons, mainly to Lithuania (83 per cent) and Ukraine (12 per cent). Although Australia says it will ban bauxite exports to Russia, the impact is minimal because there is little import and export of bauxite between the two countries. In addition, it is speculated that Russia will lose about 1000 tons of net imports from Ukraine, while about 1000 tons of bauxite from the Netherlands and Spain are at risk of sanctions. As the above volume is small, the impact is negligible.

As far as Rusal is concerned, the mine end link is also difficult to show a big contradiction. First of all, according to the Rusal Annual report, Rusal produced about 3.05 million tons of alumina in Russia in 21 years, about 5.68 million tons of bauxite and 4.6 million tons of nepheline, which is enough to match the needs of domestic production. Second, Rusal's foreign mines are all in African countries, and the possibility of mining stagnation due to sanctions is low. The most important thing to pay attention to at the mine end is whether the shipping is smooth or not.

3. Where will the global aluminum trade go in the post-Russian-Ukrainian conflict era?

By early April 22, Russia and Ukraine had held six rounds of negotiations, and after the Bucha massacre (the truth has not yet been decided) on April 5, Ukrainian President Zelansky said that he would no longer negotiate with Russia on the demilitarization of Ukraine. He also said that if NATO extended an invitation to Ukraine, Ukraine would be ready to join, and the situation between Russia and Ukraine would once again be deadlocked. Reviewing the evolution of the conflict between Russia and Ukraine, aluminum, as one of the most affected species of non-ferrous metals, how its global trade will evolve in the future is still the focus of market concern. First of all, there is no need to worry too much about alumina supply around the world. At present, Australia's ban on alumina exports to Russia has only caused a short-term mismatch between supply and demand, as the alumina that should have flowed to Russia gradually found other buyers. On the contrary, the global market (except Russia) has more than 1 million tons of alumina supply (originally to Russia). At the same time, the sharp rise in overseas prices in March led to the temporary opening of the domestic alumina export window, stimulating some domestic alumina exports. As a result, alumina prices, which rose due to sanctions news, fell back again, and even returned to the mid-February level.

On the other hand, the gap in Russia is likely to be supplemented by Chinese exports. It is expected that after the effects of the Winter Olympic Games and the heating season fade in March, when the epidemic situation improves and the ore is sufficient, the domestic alumina production capacity (including resumption of production and new investment) will be increased by nearly 15 million tons one after another, and there is a high probability that alumina supply will once again return to oversupply. Only from the point of view of quantity, alumina export is feasible. However, transport, the international political situation and other factors will still create greater uncertainty.

In terms of electrolytic aluminum, Rusal has not yet suffered sanctions, but the actual trade flow has been affected, and the possibility of being included in the scope of sanctions in the future can not be ruled out. In extreme cases, if Russia's export of electrolytic aluminum to western countries is completely blocked, then from the international situation, China and India, which are relatively friendly with Russia, have the possibility to become their alternative buyers. As far as China is concerned, Russian aluminum imports also have economic advantages. According to customs data, the average theoretical import price of raw aluminum imported from Russia from January to February is significantly lower than the monthly average price of domestic SMM. In addition, it is understood that in early April, the actual cost of domestic procurement from Rusal is still less than 20,000 yuan / ton. From January to February 2002, China imported about 57100 tons of raw aluminum, of which 28800 tons (31% less than the same period last year) came from Russia, accounting for about 50.35% of the total. It is expected that China's imports from Russia will still increase in the future.

Under this assumption, the smoothness of China's aluminum exports will be the key to the rebalance of international aluminum elements. As the domestic export of aluminum ingots need to pay 15% tariff, and aluminum exports can still enjoy the tax rebate policy, so China's export of aluminum is generally dominated by aluminum. At present, the global supply pattern of electrolytic aluminum is more tense overseas than at home, which is the main reason why Shanghai and London have declined since the outbreak of the conflict between Russia and Ukraine. The export of aluminum can theoretically lead to the return of internal and external parity, but there are some problems such as channel and time. First of all, China's initial aluminum processing products are mainly exported to the Asia-Pacific region, of which only aluminum plate, strip and foil aluminum products are exported to Europe and the United States. Under the current pattern of lack of aluminum in Europe and the United States, the export of China's aluminum to these places needs to solve the problem of opening channels and achieving quality standards. Secondly, it takes a certain amount of time from the production of electrolytic aluminum to export to Hong Kong itself, and the development of downstream overseas buyers is also a time-consuming task. Therefore, while the current high profits from aluminum exports will inspire traders and other traders to expand their mouths, we believe that global rebalancing will take time. Under the influence of transportation, policy and other factors, it is not ruled out that the market pattern of global supply differentiation and disconnection of internal and external prices will be maintained for a period of time.

Important statement: the contents and views of this report are for reference only and do not constitute any investment recommendations. There are risks in the futures market, so you need to be cautious when entering the market.