Column: Alumina Ban In Australia Will Hit Rusal And Aluminum

LONDON, March 21 – Australia’s decision to ban alumina exports to Russia has further increased pressure on the commodity sector of Russian aluminum giant Rusal. More

The company’s four million tons of smelting capacity annually process eight million tons of alumina, which is intermediate between bauxite and refined metal in the aluminum production chain.

Last year, RUSAL’s domestic alumina refineries provided only 37% of the needs of its smelters. The balance has been imported. The two leading suppliers were Ukraine, where Rusal’s Nikolayevsky refinery was closed as a result of the Russian invasion, and Australia.

The company said it is “currently evaluating” the loss of its number two raw material supplier, but the market has already reacted to the possible loss of Russian metal.

Three-month aluminum trading on the London Metal Exchange (LME) jumped more than 5% at the open to $3,554 a ton on Monday morning and last traded around $3,545.

Alumina imports to Russia in 2021

RAW SQUEEGEE

Rusal has so far managed to avoid direct Western sanctions thanks to a deal struck to lift U.S. sanctions in 2019. Rusal’s oligarch owner Oleg Deripaska remained on the blacklist, but Rusal was expelled after cutting its controlling stake in the EN+ holding.

Although it may have just changed.

The Australian government ban, introduced to stop shipments of alumina to Russia this week, does not explicitly mention Rusal, but is a de facto sanction against the company that dominates Russia’s aluminum production.

The status of Rusal’s 20% stake in the QAL refinery in Queensland is highly controversial as it is currently unable to export its stake and its partner Rio Tinto (RIO.L) intends to pull out of all joint ventures in Russia. More

Rio has already suspended a tolling deal with Rusal’s Aughinish alumina refinery in Ireland, forcing the Russian producer to divert bauxite supplies from its mines in Guinea.

Such self-sanctions limit Rusal’s room for maneuver in terms of replacing lost Australian raw materials.

The marine alumina market is dominated by Rio Tinto, American producer Alcoa (AA.N) and Norwegian Hydro. All three have said they will reduce contacts with Russia or, in the case of Hydro, will not enter into new contracts with Russian companies.

The biggest question mark of all hangs over the Irish refinery, Rusal’s largest overseas alumina refinery, which produced 1.9 million tonnes last year.

In 2021, only a quarter of its production went to Russia, which means that there is a lot of potential to redirect supplies from Europe to Russia.

It is clear that the Irish government is keen to keep Aughinish running, but the European Union has already extended sanctions to the steel scene, banning Russian steel imports, and will no doubt see Australian sanctions tightening.

However, with or without an Irish lifeline, Rusal faces a shortage of raw materials.

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

Even assuming Rusal has the political will to supply alumina, there may be no market stimulus given expectations of rising domestic demand for alumina as Chinese aluminum smelters ramp up production after easing electricity controls.

ALUMINUM SQUARE

The reaction of aluminum prices to news of the Australian ban shows how concerned they are about the potential loss of metal production in Russia.

As the Australian Department of Foreign Affairs kindly pointed out in a statement, “Aluminum is a global raw material for the automotive, aerospace, packaging, engineering and construction industries.”

What is the real problem if the West loses access to four million tons of Rusal’s annual production.

The aluminum supply chain was already creaking. Energy efficiency restrictions have turned China, the world’s largest producer, into a net importer of raw aluminum that fuels its huge recycled products sector.

Production at Europe’s energy-hungry smelters is falling due to high energy prices, a phenomenon only exacerbated by Russia’s February 24 launch of a so-called “special military operation” to disarm and “denazify” Ukraine.

Apparent stocks of aluminum have steadily declined for more than a year to close gaps in the supply chain. The LME’s total inventory is 704,850 tons, the lowest level since 2007.

The global aluminum market is overburdened, especially the Western European market, both due to recent production cuts and its dependence on supplies from Russia.

Europe accounted for 41% of Rusal’s sales last year, and supply disruptions to Russia will only exacerbate the existing supply shortage in the region.

In addition, Rusal is an important supplier of “green” – low-carbon – aluminum from its Siberian hydroelectric smelters.

While global aluminum trade flows may eventually change in the wake of the Ukrainian crisis, automakers seeking to use only the greenest metal in their next-generation electric vehicles could face a much more difficult supply situation.

TIGHTENING THE SANCTION SCREW

The complexity of Rusal’s raw material supply chain was exposed back in 2018, when US sanctions set off a chain reaction that swept through Ireland, Guinea and Australia, ending with European car companies lobbying the European Commission to petition the United States.

These US sanctions were a bolt from the blue.

This time around, the effect has been more gradual so far, as supply, logistics, and funding capabilities are dwindling due to self-sanctioning.

The Australian Government’s move to list alumina on the sanctions list marks a significant escalation in this process.

It is critically important for both Rusal and the aluminum market whether other countries follow suit.

The views expressed here are those of the author, a Reuters columnist.

Editing: Emilia Sithole-Matharis

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