News that the US may target Russian aluminum in retaliation for attacks in Ukraine is sending shivers through the global metals market, reviving memories of the panic that followed previous sanctions on United Co. Rusal International PJSC just four years ago.
The Biden administration is eyeing three potential measures after Russia’s strikes on Kyiv and other Ukrainian cities this week, Bloomberg reported on Wednesday. Traders are now scrambling to game out the consequences of any potential penalties.
Sanctions on Rusal — the most severe of the three options — could once again freeze the giant producer out of western markets. Such a move could roil the global trade and add pressure on Europe’s already struggling factories that rely on Russian aluminum much more than their US counterparts. The other two possible routes, import tariffs or a full ban on US imports, would be less disruptive, but could mean US manufacturers and consumers end up paying more.
Aluminum, the most widely used base metal, has already had a tumultuous year. Prices rocketed to a record in March but tumbled as the economic outlook soured. The market was jolted again last month after Bloomberg reported the London Metal Exchange planned to discuss its own ban on new Russian supplies.
With the prospect of even more turmoil to come, here’s what traders are watching:
The Sanctions Option
Any sanctions that make it difficult for Rusal to do business in dollars could have a profound impact on the global aluminum trade, where deals are largely priced in the US currency. Rusal is a key supplier to manufacturers and traders around the world, but particularly in Europe. Trading giant Glencore Plc has a vast multiyear contract to buy aluminum from Rusal.
While some buyers have already been trying to avoid Russian metal, European factories are particularly reliant on specialized products that can be hard to substitute. When the US Treasury sanctioned Rusal in 2018, European manufacturers played a significant role in successfully lobbying to have the sanctions removed, and the saga has been widely viewed as a political misstep that overlooked just how critical Rusal was to the global manufacturing supply chain.
Sanctions could lead to supply tightness and potential shortages in Europe, while accelerating a rerouting of metal into China, where Rusal sells in yuan. But the company would be likely to be forced to sell at steep discounts and China itself is typically a net exporter, so an increase in volumes from Russia could eventually lead to a flood of Chinese aluminum into other Asian markets.
“Ultimately this is about the increasing segmentation of metal and markets — and aluminum in particular — down geopolitical lines,” Colin Hamilton, managing director for commodities research at BMO Capital Markets, said by phone. “We think this will be a primarily be a reshuffling of the deck, and that Russian aluminum will still be produced, but perhaps no-one will want it.”
At the other end of the spectrum, the White House may impose punitive tariffs on Russian aluminum, which could hit Russia’s export revenues while having a muted impact on the global market.
The move would be supportive for aluminum producers in the US like Alcoa Corp., which has lobbied against Rusal metal.
But the losers in that scenario could be US buyers, who are already paying hefty tariffs to get metal from overseas.
The cost to source metal in the US may climb if buyers have to find replacements for the Russian imports that would become too costly with a punitive tax. The US still relies on about 10% of its imports coming from Russia, so tight supplies in the near term could mean end users like beverage companies and automakers must pass through higher costs to the average American.
The Oil Playbook
The third option would be an outright ban on sales of Russian aluminum into the US, similar to those set to be imposed by the European Union and US on crude oil sales.
Again, the key impact would be protection for US aluminum producers, and potentially higher prices for local factories.
At first glance, such measures may have a minor impact on global trade flows because — unlike in the case of sanctions — the restrictions don’t extend beyond the US.
Still, as with crude, there is also a risk of a wider impact should the US decide to impose measures that prevent traders from facilitating the sale of Russian aluminum to third countries.
The LME’s Response
The proposed measures could also have major implications on the flow of metal in and out of the LME’s global warehousing network.
The bourse has this month kickstarted a discussion on potentially blocking new deliveries of Russian metal into its storage depots, in a move that would have significant consequences for Russian producers and consumers worldwide.
Independently of those discussions, direct sanctions would force the LME to take measures to block new deliveries of Rusal metal, as it did in 2018.