The United States has sanctioned and frozen the assets of Oleg Deripaska and UC Rusal that are subject to US jurisdiction, prompting bullish sentiment and expectations of tightness in the US aluminium market, industry participants told Metal Bulletin.
Rusal, one of the world's largest aluminium producers, responsible for 7% of global aluminium production, was designated an oligarch-owned company by the Treasury Department on Friday. The Treasury designated Rusal stakeholder Viktor Vekselberg as an oligarch as well.
"Rusal is aware of its inclusion in the OFAC's SDN [Office of Foreign Asset Control's Specially Designated Nationals] list. The company regrets this development and is currently analyzing the situation with its legal advisers," a Rusal spokesperson said.
The Treasury's Office of Foreign Asset Control is issuing two general licenses to minimize immediate disruptions to US persons, partners and allies. That could allow Rusal to continue to do business in the US for the time being - and is feeding uncertainty in the market.
Rusal shares on the Moscow Exchange declined by 17.7% on Friday after news of the sanctions broke.
Glencore, which owns an 8.75% stake in Rusal, is expected to be significantly affected by the sanctions. Shares for Glencore closed down 2.1% on the London Stock Exchange on Friday.
Metal Bulletin reported last September that Glencore allegedly required the Russian producer to supply it with roughly 14.5 million tonnes of commodity-grade aluminium over the seven years since 2012. Notably, only units in the US or committed to go there may be subject to the sanctions.
Company representatives declined Metal Bulletin's request for comment.
"Glencore has the most to lose out of the whole thing. No one’s tied up with as much Rusal as they are," one trader said, voicing a sentiment supported by several other sources.
Uncertainty and expected tight supply
The sanction and freezing of Rusal and Deripaska's assets under US jurisdiction is expected to push the US market away from using Rusal units, which possibility is spurring bullish sentiment in the global aluminium market.
The US imported 710,000 tonnes of aluminium from Russia in 2017, according to the US Geological Survey.
The US Midwest delivered P1020 premium was assessed at 18.75-19.25 cents per lb and the benchmark Rotterdam European duty-unpaid premium at $98-105 per tonne on Friday April 6.
CME Group forward contracts for the US Midwest premium moved higher on Friday, narrowing the spread between futures and spot assessments. The forward premium for May was seen at 18 cents per lb on April 6, compared with 16 cents per lb on Tuesday April 3.
Market participants, some of whom were shocked by the sanctions, expect that development will be bullish for premiums and that the market will significantly tighten. Still, some industry participants were trying to process what the sanctions mean for Rusal aluminium units in the US as a whole.
"[We're] still trying to understand whether this applies to stocks already in the US," a second trader said.
A running theme among the participants Metal Bulletin spoke with was that stricter compliance for financing and handling Rusal metal could force buyers to turn to other brands, which in turn would greatly tighten the US market.
"The US and Europe need Russian metal, especially the EU," a third trader said.
Others were more bearish, saying that displaced Rusal units could increase supply and lower premiums elsewhere in the world.
"Certain consumers can’t take this stuff for compliance reasons. You’re headed to the tightest aluminium market in a long time," the first trader said. And if US participants shun the Rusal units, Russian metal could be rerouted to markets like South America, this trader added.
Others said the uncertainty alone was stirring bullish market sentiment.
Following the announcement, aluminium prices on the London Metals Exchange rallied by 2.2% at the close on Friday. Volumes also rocketed from 4,106 lots at midday to 15,751 lots at close. The metal has kept climbing since the 5pm Ring close, and was seen trading at $2,060.50 per tonne on LME Select on Friday evening London time.
"The market will get bullish because there’s a lack of [information]," a fourth trader said. "First reaction: [Prices are going] to be bullish until things get sorted.”
No de-listing, for now
The LME lists six primary aluminium Rusal brands and has no plans to de-list them, but will closely work with the core market and monitor the situation, a spokeswoman for the exchange told Metal Bulletin.
"The LME’s brand listing requirements are deliberately based on international standards and it is for individual stakeholders on the LME to determine if particular brands are acceptable for their use, given their legal or regulatory framework. The LME does not believe that today’s announcements change that structure and as such, is not proposing to make any immediate changes," the spokeswoman said.
Hassan Butt, London, and Tom Jennemann, New York, contributed to this article.