Will Heady Aluminium Prices Continue?

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As US tariffs and trade sanctions rock global markets prices for aluminium and alumina have soared. Will the heady prices continue?

-US merchant aluminium prices likely to trade with at least a 10% premium
-China may try to take advantage of alumina shortage and export
-US/Europe aluminium price differential the highest in 20 years
 

By Eva Brocklehurst

Aluminium and alumina are to the fore in global trade hot spots, amid sanctions being imposed on Russia and an outage at the world's largest refinery. The issues of sanctions and tariffs have potential to be very disruptive to global trade.

Aluminium prices have risen 20% since the US announced sanctions against Russian officials and state-owned companies, such as Rusal. Meanwhile, a jump in alumina prices has occurred because a full re-start of the Alunorte refinery in Brazil now looks more distant.

UBS notes the US market remains the main prize for aluminium, as it consumes 6mtpa but produces just 0.8mtpa. Yet the US has imposed trade barriers, which means some metal entering the US will face a 10% tariff. Producers of aluminium which do not incur a tariff, or sanctions in the case of Russia, will enter the US and attract a premium.

The broker expects US merchant prices may trade at least with a 10% premium for tariffs, and maybe more if taking account of scarcity and heightened uncertainty. US aluminium prices have risen to US$2,680/t and are now US$1,080/t higher than they were two years ago.

Meanwhile, Norsk Hydro has stated that while there has been no environmental damage from the Alunorte refinery spill, there is no date set for a resumption of production. This requires government approvals including an operating licence on a new tailings dam. Credit Suisse guesses a six-month outage, noting tightness in the market has sent the Australian price of alumina soaring.

Yet, by the third quarter, third-party alumina supply may increase and the price unwind. Norsk Hydro is also curtailing the Albras smelter in Brazil as well so the loss to the third-party market may well be reduced.

Credit Suisse suggests China may try to take advantage of the Alunorte outage and export its alumina. Furthermore, the status of several alumina refineries, with combined capacity of 4.6mtpa, remains questionable.

These have traditionally supplied the Caspian region and could begin supplying the third-party alumina market, in which case the broker estimates the additional third-party supply would outweigh the loss from the Alunorte curtailment.

UBS estimates that while the outage continues, alumina prices will remain above US$400/t as there is no ability to replace all the capacity in the short term. This threatens around 2.9mtpa of alumina production and 1.5% of metal production downstream.

Those companies the broker considers exposed to better merchant premia and higher alumina prices include Rio Tinto ((RIO)), South32 ((S32)) and Alumina Ltd ((AWC)).

Tariffs

Temporary exclusions suggest that only around 50% of US aluminium imports are exposed to tariffs, which Commonwealth Bank analysts expect will water down the desired impact.

Tariff exceptions suggest that aluminium markets outside of the US will need to absorb less than 1% of global production. This may be a negative for prices, although the analysts suspect aluminium markets will comfortably absorb the excess supply.

Citi observes US all-in prices have increased sharply relative to European prices, the difference blowing out to US$310/t from a US$40-50/t premium at the beginning of the year. This is the highest differential in 20 years. A 10% US import tariff with around 50% exemptions would explain roughly US$110/t of the increase, the broker calculates.

These dynamics present a hedging opportunity over coming months for some producers, including those potentially re-starting capacity in the US, but Citi warns that some of the drivers of this rally may disappear within a year and potentially sooner.

It is probable that, over time, US production re-starts and helps restore the balance in the market, thus lowering the need for tariffs. This would eventually put downward pressure on US premiums.

Sanctions

The sanctions on Rusal aim to isolate its activity in global markets and have already resulted in the London Metal Exchange, COMEX and international traders refusing Rusal aluminium. At present Russia produces around 6% of global aluminium and in 2017, 18% of its supply was sold to North America.

The surge in prices is consistent with markets discounting around 7-8% of global supply, CBA analysts estimate. They believe the latest price increase is an overreaction and suggest an aluminium price of around US$2,250/t is fair in the short term.

While the sanctions have created an immediate shortage, the analysts suspect some Rusal aluminium will eventually find its way to the market – as long as there is enough distance between targeted official Oleg Deripaska and the profits from Rusal – although this will require a change in global aluminium trade flows.

China

The main upside risk to forecasts for aluminium is if Chinese policy makers further target over-capacity and pollution from that country's aluminium smelters. The government has already outlined plans to reduce illegal capacity and cut output during the winter heating season.

CBA analysts suggest cuts to illegal production are the bigger threat as they potentially remove 8-10%, or 5-6mtpa, of aluminium supply. Adding to supply reductions are rising production costs reflecting more expensive raw materials – alumina, anode and coke.

On the negative side, rising Shanghai aluminium stockpiles support claims there remains plenty of aluminium available in China and, the analysts suggest, if this continues to be the case prices may sink back.

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