The US Midwest aluminium premium surged by 20% after the United States Treasury imposed sanctions on Russian oligarch Oleg Deripaska and aluminium producer UC Rusal. The Asian and European markets remained mostly firm while market participants assessed the effects of the sanctions on the physical markets.
- The US Midwest premium is up by nearly 20% after the sanctions cut a significant amount of aluminium imports out of the US market.
- Aluminium premiums in Brazil were at their highest since August 2015, with the market facing rising US Midwest premiums and domestic supply disruptions.
- In Europe, the premium for aluminium in Rotterdam on a duty-unpaid basis remained unchanged, with the market facing low liquidity after the Rusal sanction.
- Premiums in Asia were mostly firm, with participants adopting a wait-and-see approach.
- Spreads on the London Metal Exchange have been volatile following the treasury’s announcement. The LME cash/three-month spread swung week-on-week to a $5.25 backwardation from an $18.75 contango.
US premium at near-record levels
The US Midwest aluminium premium has soared by nearly 20% week-on-week as a result of consternation in the market about the US sanctions that froze assets belonging to Russian oligarch Oleg Deripaska and aluminium producer UC Rusal – and cut a significant amount of aluminium imports out of the US market.
The US Treasury on Friday April 6 targeted a group of Russian government officials and oligarchs, and the companies that they control, for reasons including Russia’s involvement in the annexation of Ukraine’s Crimea peninsula and in the unrest in Syria, the department said.
American Metal Market’s assessment on April 10 of the spot US P1020-grade aluminium premium places it at 22-23 cents per lb, up by 18.4% from 18.75-19.25 cents per lb on Friday. This is a year-high for the premium, and is about 1.5 cents lower than the premium’s record high of 24.00-24.25 cents per lb, which it reached in early 2015. The premium is now up by 138.1% from the beginning of the year.
While the driver earlier this year for the premium’s uptick was speculation about the then-pending Section 232 report on steel and aluminium imports into the US, the driver this week was mostly speculation about how the market will handle the sanctions on Rusal, since many buyers are reliant on Russia-origin metal.
“This is the sort of confusion that the market doesn’t need,” one supplier said.
Some traders said that customers had been in a state of panic since the sanctions were handed down on Friday, but others said that buyers and sellers alike were reluctant to engage with the spot market until some clarity was gained.
“Customers are coming out of the woodwork nervous,” a second supplier said. “All of a sudden, the world of traders got really small… I’m going to squeeze my customers now.”
Brazil premiums return to 2015 levels
Domestic aluminium ingot premiums in Brazil have reached their highest level since August 2015 due to concerns about domestic supply disruptions and the soaring US Midwest premiums.
Metal Bulletin assessed the P1020-grade aluminium premium, ddp São Paulo, at $340-380 per tonne on April 10, up by 7.5% from a week earlier.
Meanwhile, aluminium premiums on a cif main Brazilian ports basis rose to $210-220 per tonne, from $190-210 per tonne last Tuesday. This is the highest level since June 2015.
“Premiums have been on the rise due to the spike in the [US] Midwest premiums and supply fears in Brazil,” one seller said. “Now that the confirmation of the troubles at Albras just came out, premiums should move even higher.”
Norsk Hydro’s Albras smelter in Brazil announced earlier on Tuesday that it is cutting its aluminium production by 50% due to restricted alumina supply from Alunorte, which was ordered by the government to halve its output on worries about water contamination after heavy rains.
“I am really concerned about what might happen now,” one consumer said, which buys ingot from Albras through a contract.
European market grinds to a halt
The benchmark premium for P1020a material in Rotterdam on a duty-unpaid basis increased week-on-week to $98-105 per tonne on April 10, from $95-103 per tonne. It has, however, remained steady since the US announced its sanctions on Rusal last Friday.
Market participants are holding on to metal while they try to figure out the major effects of the sanctions. “If premiums move up, we would not want to miss a trade,” one trader in Europe said.
Still, the general expectation is for premiums to increase in the next few days while more market participants are expected to stay away from Rusal-branded metal, making the market tight for some.
There is an expectation that financial institutions and buyers with a presence in the US will stay away from Rusal material. There has been very little duty-unpaid business concluded since the start of the week.
“No-one wants to use [Rusal metal. It’s almost as if it were] contaminated,” a second trader in Europe said.
Banks and financers are staying away from financing Rusal material for now, market participants said, making the metal nearly impossible to transact at the moment.
“Banks don’t want to take [Rusal metal],” a third trader said.
“You can’t trade [Rusal metal] in dollars because it goes through US banks,” a financing source said.
The P1020a Rotterdam duty-paid premium moved up to $164-174 per tonne from $160-169 week-on-week on April 10, reflecting a 12% uptick in the London Metal Exchange aluminium cash price to $2,206.25 per tonne week-on-week and a deal reported above the range.
Premiums for aluminium on an fca duty-paid basis in Italy remain high, at $200-210 per tonne, with the market there continuing to be tight. But market participants there expect fresh non-Rusal metal to arrive in the next few weeks, which could add pressure to the market.
The aluminium premium for metal on a cif basis in Turkey also remained steady at $120-140 per tonne, although there is an expectation that a flood of Rusal metal will hit the market.
“The Turkish market will be swamped with Rusal units,” a fourth trader in Europe said. “It’s going to be interesting.”
Premiums mostly firm in Asia, eyes on US policies
The spot aluminium premium, cif main Japanese ports, remained unchanged from Friday at $110-125 per tonne on April 10, with the market taking a wait-and-see approach to the US sanctions on Rusal.
No deals were reported in a quiet Japanese market. Nearby spreads showed tightness in the market, with LME cash/April at a $3.20 per tonne backwardation and LME cash/3-month at a $16 per tonne backwardation.
Market participants in Asia have adopted a wait-and-see approach to the Rusal sanctions. Responses have so far been mixed, with some expecting a decline in demand for Russian aluminium by end-users which export to the US, and increased competition for non-Russian material. But others are concerned that Asia premiums could be damped by Russian aluminium flowing into Asia and higher LME aluminium prices.
“If Rusal can’t sell ingot, then world premiums [will] go up. But if they can sell to Europe and Asia, then premiums here will go down,” a Japanese trader said about the insecurity concerning the direction for premiums.
“There is so much uncertainty. I haven’t done deals since the [Rusal] announcement,” an Asian trader said. “I think it will take some time.”
Premiums in South Korea were stable amid slow spot demand, with the fca premium unchanged at $115-130 per tonne this week.
The US sanctions on Rusal are unlikely to have significant consequences for South Korean aluminium premiums because Russia not a major supplier of P1020-grade material to South Korea, sources said.
The Malaysia fob premium was assessed slightly lower on Tuesday, at $95-110 per tonne, compared with $100-115 per tonne a week ago, amid persistent slow demand. Deals on an fca basis were heard at $100 per tonne, with supply deemed ample within the country.
In China, Shanghai aluminium premiums on an in-warehouse and cif basis were both assessed at $95-105 per tonne on Tuesday, with offers heard as high as $105 per tonne. Deals were sparse, however, due to a closed import window and good availability of metal in the domestic market. The arbitrage import loss was $371 per tonne on April 9.
Stock levels in the country remained high, with Shanghai Futures Exchange aluminium stocks at 970,233 tonnes on April 4.