Column: Australian alumina ban will put pressure on Rusal and aluminum

LONDON (Reuters) – Australia’s decision to ban exports of alumina to Russia has increased raw material pressure on Russian aluminum giant Rusal. Read more

The company’s four million tons per year smelter capacity handles eight million tons of alumina, which lies between bauxite and the refined metal in the aluminum production chain.

Domestic alumina plants in Rusal accounted for only 37% of the needs of its smelter last year. The balance has been imported. The two largest suppliers were Ukraine, where the Russian invasion led to the closure of Rosal’s Nikolaev refinery, and Australia.

The company said it was “currently assessing” the loss of the second supplier of raw materials but the market had already responded to the potential loss from the Russian metal.

Three-month London Metal Exchange (LME) aluminum jumped more than 5% when it opened to $3,554 a ton on Monday morning and was recently trading around $3,545.

Raw material volume

Rusal has so far escaped direct Western sanctions thanks to a deal struck to lift US sanctions in 2019. Oleg Deripaska, the owner of Rusal, remains on the blacklist, but Rusal was excluded after he reduced his controlling stake in EN + holding.

This may have changed, though.

The Australian government’s ban, expedited to halt a shipment of alumina bound for Russia from departing this week, does not explicitly refer to Rusal but is a de facto punishment for the company that dominates Russian aluminum production.

The placement of Rusal’s 20% stake in QAL’s Queensland refinery is a matter of much debate given that it cannot now export its buying stake and partner Rio Tinto. (RIO.L) Committed to withdraw from all joint Russian projects. Read more

Rio has already suspended a toll-fare arrangement with Rosal’s Ogench alumina refinery in Ireland, forcing the Russian producer to redirect bauxite shipments from Guinea mines.

This self-punishment limits Rusall’s room to maneuver in terms of replacing lost Australian forage.

Rio Tinto, the American producer of Alcoa, dominates the seaborne alumina market (AA.N) and Norwegian Hydro. All three said they would reduce exposure to Russia or, in Hydro’s case, not sign new contracts with Russian entities.

The biggest question mark hangs over the Irish refinery, Rusal’s largest offshore alumina plant, with output last year of 1.9 million tons.

Only a quarter of its production flowed to Russia in 2021, which means there is plenty of potential for redirecting shipments from Europe to Russia.

Understandably, the Irish government is keen for Ogench’s work to continue, but the European Union is already extending sanctions in the minerals field with a ban on Russian steel imports, no doubt noticing Australia’s lifting of sanctions before then.

With or without Irish Lifeline, however, Rusal is facing pressure in raw materials.

China may be the answer, but China itself has been importing large amounts of alumina in recent years to keep up with demand.

Even assuming the political will to supply Rusal with alumina, market incentive may not be present, given expectations of increased domestic demand for alumina as Chinese smelters raise production following the relaxation of energy controls.

aluminum box

The reaction of the aluminum price to the news of the Australian ban tells you how worried he is about the potential loss of metal production in Russia.

As the Australian Department of Foreign Affairs helpfully noted in its statement, “Aluminium is a global input across the automotive, aerospace, packaging, machinery and construction sectors.”

And this is a real problem if the West loses access to the annual production of Rusal of four million tons.

The aluminum supply chain was already faltering. Energy efficiency restrictions have turned China, the world’s largest producer, into a net importer of unworked aluminum to feed its huge downstream product sector.

Production at energy-starved smelters in Europe has fallen due to rising energy prices, a phenomenon that has only worsened since Russia launched on February 24 what it calls a “special military operation” to disarm and “discredit” Ukraine.

Visible aluminum stocks have been steadily declining for more than a year to fill supply chain gaps. Total LME inventories are 704850 tons, the lowest level since 2007.

The global aluminum market is tight, the Western European market in particular, due to recent smelter cutbacks and its dependence on Russian supply.

Europe accounted for 41% of Rusal’s sales last year, and disruption to Russian shipments will only add to the region’s current supply deficit.

Moreover, Rusal is an important supplier of “green” – low carbon – aluminum from Siberian hydro-powered smelters.

While global aluminum trade flows may eventually adjust in the wake of the Ukraine crisis, automakers keen to use only the greenest metal in their next-generation electric vehicles may find a more challenging supply landscape.

Tighten the penalty screw

The complexity of Rusal’s raw material supply network was exposed in 2018 when US sanctions set off a chain reaction that stretched to Ireland, Guinea and Australia and ended with European car companies pressing the European Commission to mediate with the US.

Those US sanctions were a thunderbolt out of the blue.

This time the effect has been more gradual so far as the avenues of supply, logistics and finance have diminished due to self-punishment.

The Australian government’s move to add alumina to the sanctions list represents a significant escalation of this process.

Crucial for both the Rusal and aluminum market is whether other countries follow suit.

The opinions expressed here are those of the Reuters columnist.

Editing by Emilia Sithole Mataris

Our criteria: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News Agency, which is committed under the principles of trust to impartiality, independence, and freedom from bias.