FOCUS: Tight market, higher premiums expected in European aluminium market after US sanctions on Rusal

The physical aluminium market in Europe is expected to turn bullish because of significant supply tightness, with more market participants likely to turn away from using metal supplied by Russian aluminium producer Rusal.

The US Treasury on Friday April 6 targeted a group of Russian government officials, oligarchs and the companies 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.

Those targeted include Rusal, non-executive board Member Oleg Deripaska and Rusal shareholder EN+ Group.

The benchmark duty-unpaid premium for Rotterdam P1020A aluminium was unchanged at $98-105 per tonne on Monday April 9, with participants still assessing what the sanctions against Rusal would mean for market fundamentals. But most market participants Metal Bulletin spoke to on Monday expected premiums to rise in the next few days.

Financial institutions and large consumers in Europe which have a presence in the United States are expected to avoid using Rusal material. This is because of the potential risks to their compliance status that would come from dealing with a company that is listed by the US Office of Foreign Asset Control among Specially Designated Nationals, which limits the aluminium brands that companies may deal with and finance.

There is also an expectation the sanctions will primarily affect fresh Rusal units and not, for example, old Rusal units that have fully been paid off but uncertainty remains.

The US Treasury announcement on April 6 said that non-US parties could face sanctions for knowingly facilitating “significant transactions for or on behalf of the individuals or entities blocked.” This situation is also a concern for European market participants.

“The point is that you can’t trade [Rusal material] in dollars because it goes through US banks,” a financing source said. “Much of the European market is Russian. Why would you buy [such material]? You can’t even put it on the market.”

Rusal is one of the world’s largest producers of aluminium, providing 7% of global supply, according to the US Treasury. According to the European Union, imports of unwrought aluminium from Russia made up nearly 38% of the region’s total aluminium imports in 2017.

“As a percentage of overall supply, Europe is in much, much more trouble than [the US],” a trader in Europe said.

The market expects financial institutions and others to stay away from financing Rusal material.

On Tuesday, Glencore announced that it was evaluating its contracts with Rusal and noted those contracts were not “financially material”, while Glencore chief executive Ivan Glasenberg resigned from his position as a director at Rusal on the same day.

“Nobody is really going to the market. Everyone is waiting [to see] what’s going to happen,” a second trader in Europe said.

Turkey diversion
Aluminium is expected to flow into other global regions where units could be financed and transacted.

“The Turkish market will be swamped with Rusal units,” a third trader in Europe said. “It’s going to be interesting.”

The price of aluminium in Turkey on a cif duty-unpaid basis was assessed by Metal Bulletin at $120-140 per tonne on April 3.

Other market participants said that South America might be another location where Rusal could send material, but supply flows remain unclear for now.

Focus on fundamentals
The London Metal Exchange aluminium cash/three-month spread swung into a $16 backwardation at Monday’s close, from around a $22 contango on the afternoon of April 6. The benchmark spread was last in backwardation on March 15.

Still, the physical market is focused on the fundamentals of the market, which are expected to tighten on the supply side if participants stop transacting Rusal material and turn to other brands.

“The focus is absolutely on the fundamentals. The fundamentals do not indicate any crazy level of backwardation,” a fourth trader said. “But depending on how some have managed their positions, we might see deals at current levels. There’s a lot of uncertainty.”