The next logical step would be for Switzerland-based miner-marketer Glencore to grow in aluminium.
The case is especially compelling given that Glencore’s near seven-million-tonne aluminium supply deal with Russian producer Rusal, via its parent EN+ Group, comes to an end in 2024.
Company chief executive officer Gary Nagle told an earnings call during the company’s 2022 results in February that Glencore’s contract with Rusal is a volume, not term, contract and should end “sometime probably towards the second half of next year.”
It was signed, Nagle confirmed, before the Russian invasion of Ukraine led many Western corporations and governments around the world to step away from doing business with and in Russia. Glencore has a 10.6% stake in EN+ Group, a stake it said it was reviewing last year but eventually concluded it had no realistic way of exiting.
Rusal supply deal
Rusal has supplied Glencore with aluminium on and off for years.
The current contract dates back to 2020, with an option to extend it to 2025. While the final terms are unknown, Rusal’s board agreed to the proposed terms in 2019 and published them in a filing to the Hong Kong Stock Exchange in 2020.
Rusal’s terms allowed Glencore to purchase up to 6.87 million tonnes of primary aluminium, including up to 344,760 tonnes in 2020 and up to 1.632 million tonnes for each year from 2021 to 2024.
The contract agreed by Rusal also permitted either party to increase sales by as much as 70,000 tonnes in 2020. In 2021-24, Rusal had the option to increase or decrease the yearly tonnage of primary aluminium by up to 200,000 tonnes. It also had the option to postpone up to 10% of each yearly tonnage of primary aluminium supply to 2025, in which case the contract would be extended by a year.
The sales contract agreed by the Rusal board also gave Glencore the option to buy up to an additional 200,000 tonnes of primary aluminium per year from 2021 to 2024, while Rusal had the right to increase its yearly tonnage of primary aluminium supply by up to a further 200,000 tonnes, in addition to the other potential increase in sales.
That contract was predated by a seven-year supply contract from 2012 through 2018, which expired when Rusal and its founder, Oleg Deripaska, were subject to sanctions by the United States.
Under the terms of that contract, which were never made public, Rusal committed to sell the majority of its primary production to Glencore.
The companies have been intertwined since the beginning: Rusal was formed in 2007 following the merger of its assets with smaller domestic rival Sual and the alumina operations of Glencore.
Glencore could, of course, extend its contract with Rusal to 2025. It could also opt to renew it, although the pressure to boycott doing business with Russia has intensified as the war in Ukraine has continued. An end to the war could alleviate the onus for Glencore to avoid the deal too. Either way, it’s a sizeable chunk of metal to lose from your portfolio.
Bauxite and alumina
Growth in aluminium also makes sense from the perspective of Glencore’s recent spate of merger & acquisition activity.
On Tuesday, April 25, Century Aluminum, in which Glencore has a 46.1% stake and an offtake deal for around 60% of its aluminium, announced it had bought a 55% stake in the Jamalco alumina refinery.
This was swiftly followed by the news earlier on Thursday that Glencore had acquired a 45% stake in Brazil’s largest bauxite producer, making it the largest shareholders, and a 30% stake in major alumina producer Alunorte.
Gobbling up stakes in high-quality bauxite and alumina assets like those in Brazil makes sense. The raw materials are the key ingredients for aluminium, a metal that is key to light weighting in manufacturing and has become a sector leader in the creation of low-carbon products over the past decade.
Glencore has been working to position itself deeper in sustainably produced metals that are critical to the energy transition, including recycling and battery raw materials. It is a major trader of aluminium, but the company’s own industrial activities in the aluminium supply chain have been limited in recent years.
In Australia, Glencore is assessing the feasibility of developing a new bauxite mine near Aurukun, Queensland, in partnership with a unit of Mitsubishi. It also has a 31.7% stake in an alumina refinery in Indonesia.
The bulk of its activities in the upstream segment were focused on marketing products from a range of third-party aluminium and alumina producers. That includes a 10-year alumina supply and aluminium offtake agreement with Malaysia’s Press Metal Bintulu Sdn. Bhd., signed last year.
It’s not clear exactly how much alumina and aluminium the company sells each year because it groups the products together. According to the company’s annual report, it marketed 10.0 million tonnes of alumina and aluminium products in 2022, up 12% from 8.9 million tonnes in 2021.
But what is clear is that if Glencore decides its Rusal contract is off limits in the future, then it will more than likely look for an alternative, whether through M&A or partnerships.
In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.
