The Gulf Today - Business - - SPECIAL REPORT -

LON­DON: The ini­tial sanc­tions shock­waves may have passed but the alu­minium mar­ket is still struc­turally stressed by the US Trea­sury’s ac­tion against Oleg Deri­paska and his Rusal alu­minium em­pire.

The price ex­plo­sion af­ter the orig­i­nal April 6 sanc­tions an­nounce­ment went into re­verse on April 23, when the US Trea­sury ex­tended the dead­line until Oc­to­ber and held out an olive branch to Rusal (but not Deri­paska).

Af­ter hit­ting a seven-year high of $2,718 per tonne on April 19 the Lon­don Metal Ex­change (LME) alu­minium price has re­treated to a cur­rent $2,268.

The mar­ket seems to be bet­ting that Deri­paska’s of­fer to re­duce his stake in and re­move him­self from Rusal will re­sult in a swift lift­ing of the sanc­tions that have roiled the sup­ply chain.

How­ever, the ten­sions caused by the par­tial lock-out from the global mar­ket of the largest pro­ducer out­side of China are still ev­i­dent.

LME time-spreads are con­tract­ing again and huge ton­nages of stocks are be­ing flipped around against a back­drop of tight­en­ing phys­i­cal mar­kets.

The storm has abated but it may not yet be over.

LME alu­minium time-spreads went su­per-tight in the days af­ter the orig­i­nal sanc­tions an­nounce­ment, the cash-to-three months pe­riod flex­ing out to a $56-per tonne back­war­da­tion, a level not seen in many, many years.

It’s what hap­pens when around 36 per cent of an ex­change’s regis­tered in­ven­tory is placed un­der sanc­tions watch. That’s the amount of Lme-stored alu­minium that was cat­e­gorised as “East­ern Euro­pean” as of the end of March.

Ner­vous fi­nanciers of off-mar­ket Rus­sian stocks also dumped around 150,000 tonnes of metal back into LME ware­houses, mostly in the Nether­lands, over the fol­low­ing week.

The LME calmed things down with a state­ment that it would sus­pend all new de­liv­er­ies of Rusal­brand alu­minium but that metal al­ready in the sys­tem be­fore April 6 would still con­sti­tute good de­liv­ery.

It has since been asked to ex­tend that date in line with the sanc­tions ex­ten­sion but has de­clined on the grounds that a nor­mal metal cer­ti­fi­ca­tion chain is very dif­fer­ent from a sanc­tions cer­ti­fi­ca­tion chain.

That leaves one of the big­gest sup­pli­ers of stocks liq­uid­ity to the LME locked out of the ex­change de­liv­ery sys­tem.

It has also served to in­crease the value of Lme-stored metal that comes from any­where other than Rus­sia.

There were mas­sive can­cel­la­tions of alu­minium stored at the Malaysian port of Port Klang in the week af­ter the ini­tial sanc­tions hit, 108,725 tonnes mov­ing to the load-out queue in a sin­gle day.

All of that metal and more has just been dumped back into the LME sys­tem, Thurs­day morn­ing’s stocks re­port show­ing “re­verse can­cel­la­tions” of 138,650 tonnes at the same lo­ca­tion.

As ever with this par­tic­u­lar mar­ket, the un­der­ly­ing forces at work are opaque, but the scale of these stock move­ments points to trad­ing-book stress.

So too does a re­newed tight­en­ing of the time-spreads.

Af­ter mov­ing to a dis­count to the three-month price last week, the spot price has just moved back to a sig­nif­i­cant pre­mium again.

The cash-to-three-months time­spread closed Wed­nes­day val­ued at $21.25 per tonne back­war­da­tion with the tight­ness con­cen­trated on the July-au­gust spread, val­ued at $35.00 back­war­da­tion.

The Lon­don alu­minium mar­ket is no stranger to spo­radic time­spread squeezes but this volatil­ity is ex­treme by re­cent his­tor­i­cal stan­dards.

And dip­ping into the off-mar­ket pool of Rusal metal to de­liver against a short po­si­tion is no longer an easy op­tion.

Find­ing al­ter­na­tive-brand metal, mean­while, may be in­creas­ingly dif­fi­cult as the phys­i­cal mar­ket tight­ens.

Pre­mi­ums for alu­minium in the US Mid­west re­main el­e­vated on the com­bi­na­tion of tar­iffs and the loss of a ma­jor sup­plier to a mar­ket that im­ported al­most 700,000 tonnes last year.

The CME spot con­tract closed Wed­nes­day at 22.0 cents per pound, equiv­a­lent to $485 per tonne.

It’s worth re­mem­ber­ing that the Rusal tur­moil comes on top of two smelter out­ages, a rel­a­tively rare event in the alu­minium pro­duc­tion sec­tor.

The alu­mina seg­ment of the sup­ply chain has gone wild be­cause off the dou­ble-whammy of sanc­tions and the par­tial clo­sure of the gi­ant Alunorte re­fin­ery in Brazil.

But Alunorte’s loss of pro­duc­tion has also caused owner Hy­dro to close 230,000-tonnes per year of in­te­grated metal ca­pac­ity at the Al­bras smelter.

In Canada, mean­while, a union lock-out at the Be­can­cour smelter is now in its fourth month.

Al­coa, which owns a ma­jor­ity stake in the 438,000-tonne per year plant, said in its first-quar­ter re­port that only one out of three pot­lines has been in op­er­a­tion since Jan. 11.

Al­bras and Be­can­cour were al­ready dis­rupt­ing the alu­minium sup­ply chain be­fore the US Trea­sury cast its sanc­tions spell on Rusal’s 3.7 mil­lion tonnes of an­nu­alised pro­duc­tion.

Tight­ness in the pa­per mar­ket, in other words, is be­ing re­in­forced by tight­ness in the phys­i­cal mar­ket.

So far the out­right alu­minium price is un­fazed by the rum­blings em­a­nat­ing from the spreads and the mega trans­fers of stocks.

How­ever, the calm may not last for long.

Re­search house CRU spells out the two op­tions fac­ing the mar­ket, namely lift­ing US sanc­tions on Rusal or keep­ing them in place.

Even if sanc­tions are lifted, the process could take “sev­eral months” and cause a suf­fi­cient draw on in­ven­tory to lift the price to $2,600-$2,700, CRU ar­gues in a re­search note pub­lished by Fitch Rat­ings (“Rusal Sanc­tions Out­come Key to Alu­minium Prices”, May 15, 2018).

If sanc­tions stay, they would limit Rusal’s abil­ity to sell to coun­tries such as Turkey and South Korea which have ex­pe­ri­ence in nav­i­gat­ing oil sanc­tions on Iran.

More­over, “sup­plies of baux­ite and alu­mina to Rus­sia from most of its over­seas op­er­a­tions would be halted, dras­ti­cally cur­tail­ing Rusal’s pri­mary alu­minium out­put to 2.3 mil­lion tonnes in 2019.” Un­der this scenario the price could peak at $3,000 per tonne this year, CRU ar­gues.

Right now, the mar­ket doesn’t seem to agree, pric­ing in an al­most im­me­di­ate lift­ing of sanc­tions and ig­nor­ing signs of con­tin­ued dis­rup­tion to alu­minium flows.

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