Aluminium futures have risen sharply Thursday after four sessions of declines as investors pile in to make use of lower prices and as China signals a slight easing of Covid rules.
With the situation in Ukraine worsening and further sanctions against Russia looking likely, some metal market participants started self-restricting purchases of Russian metal and avoided signing new contracts with Russian suppliers for next year. This combined with the LME launching a discussion paper on possibly banning Russian metals has triggered a faster outflow of Russian metal from the country, mostly into London Metal Exchange warehouses.
Over the past weeks, stocks have increased to over 433,000 tonnes, the highest level since June, with daily arrivals in the range of 60,000 and 65,000 tonnes (although not all of it from Russia) into LME warehouses in South Korea and Malaysia. Earlier this week three-month aluminium futures dropped 2.3%.
But now some repositioning is taking place and it is being helped by China signalling that it might ease Covid restrictions for inbound travellers. Although the reduction is not big – from ten days to seven – it is seen as a key step away from the very rigid Covid rules which have impacted industrial production and on demand in the country.
The shape of US sanctions
The weaker global economic picture remains negative for aluminium but one of the factors stopping prices from seriously falling is the prospect of US sanctions.According to ING’s commodity strategists, the scale of the impact a potential US ban on Russian aluminium would have on the metals market will depend on which sanction option the US ends up choosing. If the US bans Russian aluminium directly or imposes tariffs on Russian imports, the impact both on prices in the US and on prices in global markets would be limited.
US imports of Russian aluminium are relatively small, only 5% of the country’s total imports and far behind the amount of aluminium the US buys from either Canada or the United Arab Emirates. If that happens, Russia will likely ship more metal to China or other parts of Asia.
But if instead the US chooses to put sanctions on Russia’s largest aluminium producer Rusal the impact would be much more severe because it would effectively freeze Rusal out from any Western market as other buyers would fear secondary sanctions. Rusal not only produces primary aluminium but its output of related raw materials bauxite and alumina is a crucial link in the global supply chain.
In 2018 when the US briefly imposed sanctions on Rusal it caused such turmoil in global aluminium markets that European governments asked for the sanctions to be “postponed”. At the time European smelters ended up struggling to buy raw materials for their smelters and production in Guinea and Jamaica was also affected.
Supply tightness and shortages that would likely follow would be most felt in Europe, where the industry is already grappling with low stock supplies and is more reliant on Russian supply.
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