Sanctions on Russia aluminum could hurt global supply chains: Analysts

The entire commodity market is waiting for Chinese demand to recover, says the analyst

Aluminum is the latest victim of global economic headwinds as prices fall on alleged Russian aluminum dumping, weakening global demand and rising operating costs.

Earlier this week, aluminum stocks in London Metals Exchange (LME) warehouses skyrocketed, sparking concerns about possible dumping of aluminum of Russian origin.

The White House is already considering an import ban on aluminum from the Russian producer Rusal.

Unsold metal typically ends up in the LME warehousing system, which are warehouses authorized by the exchange to store LME-registered metal.

“It has been very disappointing for the poor aluminum market to see some sort of double whammy from weakening global demand, particularly in China but also in Russia dumping aluminum onto the world market,” said Timna Tanners, mining and metals analyst at Wolfe Research. to CNBC Box Asia’s “Squawk” on Thursday.

“So this quarter definitely reflected those challenges.”

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Gloomy prospects for aluminum

The next quarter does not bode well either unless measures are taken to halt potential dumping of Russian-origin metals and boost Chinese demand in both infrastructure development and real estate construction, Tanners added.

So far, there has been little sign that Chinese demand could improve quickly as President Xi Jinping signaled at the Communist Party meeting in Beijing that China would stick to its Covid-zero policy, she added.

This is made worse by falling demand elsewhere as interest rates rise, Tanners said.

Aluminum is the latest victim of global economic headwinds as prices plummet on alleged Russian aluminum dumping, weakening demand around the world including China and soaring operating costs.

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Aluminum producers like US producer Alcoa and many in Europe are also facing higher operating costs, largely due to rising electricity prices, Tanners said.

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“Electricity accounts for about 30% of the total cost of an aluminum smelter, so they’ve been really squeezed in some of the European operations right now,” Tanners said.

CFRA Research analyst Matthew Miller was also surprised by Alcoa’s recent third-quarter loss, which the company attributed to lower aluminum prices and higher energy and key raw material costs.

Like Tanners, he told CNBC’s Street Signs Asia that “things could get worse in the fourth quarter before they get better.”

Rising inventories are a bad sign

While the LME doesn’t release where aluminum is coming from when inventories rise, a rise in global inventories bodes badly as recession fears have already hit base metal prices, said Vivek Dhar, CBA mining and energy commodities analyst.

Any inflow of Russian aluminum into LME warehouses also poses a more complex problem, Dhar said in a statement.

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“The LME price could trade at a discount to fundamentals if the stock market becomes a dumping ground for Russian metal,” he said, adding that Russia accounts for about 17% of world aluminum production.

“The LME is very aware of the problem.”

Analyst discusses aluminum producer Alcoa's third quarter results

And if the US proceeds with sanctions against Russian producer Rusal, it could impact global aluminum supply chains, Ewa Manthey, ING’s commodities strategist for economics, said in a note on Wednesday.

Manthey said this was seen in 2018, when the US Treasury Department last imposed sanctions on Russian billionaire Oleg Deripaska and companies he owns, including Rusal.

In addition to being a major producer of primary aluminum, Rusal is also embedded in global supply chains needed to manufacture the metal, bauxite and alumina, she added.

“Rusal’s 2018 sanctions impacted operations in Guinea and Jamaica, while smelters in Europe struggled to secure raw material supplies,” she said.

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