Home Commodities Commodities Outlook 2023: Aluminium faces macroeconomic headwinds | Article

Commodities Outlook 2023: Aluminium faces macroeconomic headwinds | Article

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Russian metal remains the biggest uncertainty

One potential source of price volatility would be sanctions on the Russian material either by the US or the EU. Metals have been mostly spared in the rounds of sanctions imposed on Russia that followed its invasion of Ukraine on 24 February, but it has been reported that the US is considering an effective ban on Russian imports of the metal. The Biden administration is reportedly weighing three potential measures: a complete ban on Russian aluminium, increasing tariffs to levels that would effectively act as a ban and sanctioning the company that produces Russian aluminium, Rusal.

The only government to take direct action against Russia’s aluminium sector so far has been Australia, when in March it banned the export of bauxite and alumina into the country, effectively freezing Rusal’s off-take flow from the Queensland Alumina joint venture. In Russia’s other top raw material supplier, Ukraine, the war has closed Rusal’s Nikolaev refinery. The alumina gap has been filled by Chinese producers, which have been increasing their exports to Russia.

However, if the US decides to sanction Rusal, the impact could be severe, bearing in mind the market’s reaction to the sanctions in 2018 when the LME prices jumped to $2,718/t, at the time the highest since 2011 before gradually falling in the following weeks and months. Sanctions were then lifted in January 2019.

If the US decides to go ahead, the move could freeze the Russian producer out of Western markets, depending on the severity of sanctions, which would boost global prices for the metal and distort global aluminium trade flows.

Meanwhile, at least for now, the aluminium market has a bit more clarity following the LME’s decision to take no action on the delivery of Russian metals into LME warehouses, as a significant portion of the market was still planning to buy it next year.

The LME was looking at potentially banning the delivery of Russian metal into its warehouses, limiting Russian flows or taking no action.

Instead, the exchange said it will publish regular reports from January 2023 detailing the percentage of Russian metal stored under warrant in LME warehouses to provide more transparency. In a response to the LME’s proposal, Rusal has called for the exchange to start disclosing the origin of all metal stocks on warrant rather than singling out Russia as proposed. Alcoa was also supportive of the idea of providing more details about the origin of the material in LME warehouses.

If we continue to see an increasing amount of self-sanctioning of Russian metals, the risk is that we see more Russian metal being delivered into LME warehouses, which could potentially mean that LME prices trade at discounted levels to actual traded prices. However, the LME believes we would have seen higher inflows of metals into warehouses regardless, given the depressed global outlook.

The LME’s decision to continue to allow Russian metal to be delivered into its warehouses put some downward pressure on aluminium prices, easing fears of supply shortages. How much further pressure we will see on aluminium prices going forward will depend on whether we see a significant inflow of Russian metals into LME warehouses in the weeks and months ahead.

While the LME accepts that LME prices may start to increasingly reflect the price of Russian metal if we see large inflows into LME warehouses, they believe that premia will play an important role, with this likely reflecting a larger proportion of the all-in cost, so that non-Russian metal producers continue to receive fair value for their metal.

Russia accounts for about 6% of global aluminium output estimated at 70 million tonnes this year. Russian aluminium has accounted for as much as three quarters of LME stockpiles over the past decade, according to the exchange.

The LME has reported that the proportion of Russian metal in LME warehouses has not changed significantly over the discussion paper period, with the percentage of live tonnage of Russian aluminium on warrant standing at 17.7% on 28 October, compared to 17% on 6 October when the LME launched the discussion paper.

At the same time, the flow of Russian metal into Western markets was strong in the first half of the year. European average monthly imports were up by 13% year-on-year in March through June, while the US increased its Russian imports by 21% in the same period.

Most Rusal customers have been accepting deliveries under existing contracts, however, that is likely to change next year. Self-sanctioning is likely to disrupt trade flows with the possibility of Russian metal flowing to the market of last resort – the LME.  Novelis, a division of Hindalco Industries and Norsk Hydro’s extrusions unit have already said they will not enter into new Russian purchase contracts for 2023.

Rusal has recently said that its sales picked up after the LME’s decision, exceeding 76% of its primary aluminium production and value-added production for 2023.

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