One week ago, when the Trump administration unveiled the most draconian Russian sanctions yet which among others targeted Putin-ally Oleg Deripaska and the Russian oligarch's aluminum giant, Rusal, we said that aluminum prices are going higher, much higher, for one reason: excluding China's zombie producers, Rusal is the world's largest producer of aluminum.
Well, prices have since surged, largely as expected, and one week later we also learned just how "radioactive' Rusal's products have become as a result of the US sanctions: overnight Reuters reported that major Japanese trading houses asked the Russian aluminum producer to stop shipping refined aluminum and other products in light of U.S. sanctions on the world's No.2 producer and are scrambling to secure metal elsewhere, according to industry sources.
"We have requested Rusal stop shipments of aluminum for our term contracts as we can't make payment in U.S. dollars and we don't want to take the risk of becoming a secondary sanction target by the United States," said a source at a trading house, who declined to be named due to the sensitivity of the issue.
Rusal's biggest Japanese clients include trading house such as Mitsubishi, Marubeni, Sumitomo and Mitsui. "We are holding internal discussions on what actions are needed to take," a Sumitomo spokesman said. The trading house is also talking with customers about alternative supplies, he said. Other Japanese buyers, including fabricators, are also still considering how best to deal with the sanctions on Rusal.
As a result of the US sanctions, Japanese buyers were left with concerns about tightening availability, which has nearly doubled domestic spot premiums for aluminum and lifting global prices by a fifth, a surge which continues today. London Metal Exchange aluminum topped $2,400 a tonne on Monday for the first time in more than six years and is holding near there on Tuesday. The contract has gained about 20% this month.
It is unclear how and where Japan can find alternative sources of aluminum: Japan buys about 300,000 tonnes of refined aluminum from Russia, about 16% of the nation's total import, according to the Japan Aluminium Association.
"Everyone has been on a search for substitutes and that pushed local spot premiums to around $200-$250 per tonne by last Friday," he said.
That's sharply higher than Japan term premiums for April-June quarter shipments at $129 per tonne.
"The sanction came as a total surprise and we are in an almost panic situation," a source at a second trading company said. Analysts however have said Japanese buyers would be able to find replacements for refined metal from Australia, the Middle East, Malaysia and India, although securing alternatives for specialized value-added products would be harder.
The trading halt will not come as a surprise to Rusal, however, which last week first proactively reached out to clients telling them to stop payments: "Rusal asked us to halt payments soon after the U.S. sanctions were announced as they can't access U.S. dollar accounts," a source at a Japanese fabricator said.
For now, the Russian smelter is still trying to find a way to continue business with customers in Japan by finding an alternative means of settlement, according to Reuters, although this is expected to be complicated as most of its Japanese customers use local banks, which are wary of any business involving companies on a U.S. sanctions list, the source said.
Adding insult to injury, Russia has excluded any possibility of a bailout.
Russia won’t inject sovereign bonds into Rusal’s capital as the country doesn’t use local-currency sovereign bonds and any public debt to support companies under sanctions, according to the Finance Ministry.
Predictably, Rual's loss is its competitors' gain and shares in rival suppliers rose again, including China Hongqiao Group which added as much as 3.4% in Hong Kong, while in Australia Alumina, a partner with Alcoa Corp. in the world’s largest bauxite and alumina producer, advanced as much as 4.1%.
Japan is not the only market that has vetoed Rusal products: the sanctions have thrown an estimated $3 billion of aluminum produced by Rusal into limbo as metal produced by the company accounts for more than a third of holdings in warehouses monitored by LME. The exchange has banned, with effect from April 17, deliveries of Rusal-branded metal into its sheds.
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And while Rusal may be headed for insolvency, a new question is just how acute the inflationary impact will be as a result of the soaring aluminum price, especially since some analysts warn the recent breakout is just the beginning.
“The market is looking at $2,800, $3,000,” Jackie Wang, an analyst at CRU Group, told Bloomberg. There are concerns about possible production cuts by Rusal, either because its sales are blocked or the raw material supply chain is affected, according to Wang. LME prices last topped $3,000 in 2008.
But wait, there's more, because if the US decides to extend the scope of Russian sanctions to nickel, it could have an even more dramatic impact on prices as Russia contributes 10% of supply, compared to 6% for aluminum. Russian copper production could also be included eventually, although it would have a smaller impact as Russia accounts for 4% of world production.
But the biggest irony in Trump's mini war with Russia - which as a reminder is all for show and meant to "prove" to Robert Mueller just how hard core the president is when it comes to Putin - is that the biggest winner is China: while Russian aluminum supplies are getting shunned, China continues to churn out the metal. According to the latest industrial production data released overnight, China's primary aluminum output rose 4% to 2.78 million tons in March.