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Aluminum is having the wildest week

This comes as a result of Rusal being blacklisted by the US.
It’s been an unprecedented week for aluminum.

The US’s decision to blacklist Rusal, the world’s second-biggest aluminum maker, set off a rush to secure supply. Prices rose by a record this week, with ripple effects felt by car makers in Atlanta, Swiss commodity traders and processing plants in the Irish countryside.

Read: Glencore cancels Rusal share swap

“There’s a scramble to replace Russian material with non-Russian material, which in some cases should be doable, but in others not so much,” said Robin Bhar, an analyst at Societe Generale SA, from London.

The sanctions are having an immediate and disruptive effect on global supply chains, which feed raw material into cars, planes and packaging. Rusal accounts for about 6% of the global aluminum market and is now completely cut off from the Western financial system.

Aluminum surged 13% this week, the biggest increase since the London Metal Exchange launched the current version of the contract in 1987. On Friday, prices steadied near a six-year high, trading at $2,320 (R27 912) a ton.

“Everybody’s been forced to take a hard look at aluminum,” said Fiona Boal, the director of commodity research at London-based Fulcrum Asset Management LLP, which has $7 billion (R84.2 billion) under management. “We haven’t seen that contagion risk for a number of years.”

Analysts at ICBC Standard Bank Plc said they don’t expect a sudden shortage of primary aluminum worldwide, but the impact will be in regional premiums and more specialized downstream markets.

“Exactly how the aerospace, packaging, electronics and, to a degree, automobile consumers of Rusal material resolve this problem is currently very unclear,” the analysts said.

Here’s how the sanctions are already affecting the market:

Stockpiles grab

Customers fearing a supply crunch are snapping up stockpiles on the LME. On Friday, canceled warrants rose 35% to 370 350 tons, the biggest increase since 2011. The measure tracks orders for aluminum in warehouses monitored by the exchange.

“We are not sure how Rusal’s supply will come back into the market,” said Cameron Karami, an analyst at Natixis SA in London. “Short-term inventory will get drawn down.”

Premiums skyrocket

One example of customers rushing for material – the US premium, a measure of the cost to secure LME aluminum and ship it to the Midwest, jumped by the most on record.

The duty-paid premium by consumers to suppliers surged to a range of 21.75 cents to 23.55 cents a pound, according to Austin, Texas-based researcher Harbor Intelligence, up from a prior range of 17.25-18 cents.

Spreads blow out

The structure of the aluminum market has flipped into backwardation. The rush to secure metal from the exchange has pushed aluminum for delivery now above prices farther in the future. One-year metal is $87 (R1 047) a ton more expensive than one-month, the most since 2007.

Alumina leaps

The price of alumina, the key ingredient for making aluminum, is approaching an all-time high. Rusal declared force majeure on some alumina shipments on Thursday, according to a person familiar with the matter. And that’s on top of production cuts at the world’s top alumina refinery in Brazil.

Prices in the Atlantic market are at $565 (R6 802) a metric ton, according to consultancy CRU Group, up 26% in the past week.

“Prices show no sign yet of approaching a ceiling,” said Anthony Everiss, senior consultant at CRU.

© 2018 Bloomberg L.P

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There are only losers in a trade war, no one ever wins.

Like the South African Tax payer? Lose lose lose, get poorer and poorer …

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