DRC Bans Copper and Cobalt Exports - What Do We Need to Know?
DRC Bans Copper and Cobalt Exports - What Do We Need to Know?
Natalie Scott-Gray
- Base Metals
Base Metal Commentary - Feature Article
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
LME Publishes Notice Over Sanctions on Iskander Kakhramonovich Makhmudov
At the time of writing (12am GMT), the LME 3M price is trading just below its October intra-day high (on 10th of $2,395/t), following a knee-jerk reaction in the market to the announcement by the Biden Administration (at ~4.00pm GMT on 12th October), that potential sanctions could be placed on Russian aluminium. In this commentary, we will discuss our views for the longer-term impact that sanctions could have on the wider global aluminium market.
LME 3M ALUMINIUM PRICE – IMPACT OF RUSSIAN SANCTIONS
Source: Bloomberg
LME 3M ALUMINIUM INTRA-DAY PRICE VERSUS SHFE
Source: Bloomberg
What Do We Know so Far?
As it stands, the Biden Administration has announced that potential sanctions against Russian aluminium could be in the form of either an outright ban on all Russian aluminium into the United States, an increase in import tariffs (effectively preventing imports), or sanctions targeting United Co. Rusal International PJSC (Russia’s largest aluminium producer). Following comments from a White House official (reported by Reuters), the Administration are “considering all options”, but “there is not movement on this as of now”. However, this didn’t stop the markets reacting with the LME 3M aluminium price lifting 7% following the announcement (to the time of writing).
U.S. Reliance on Russian Aluminium Trade
Russia is the world’s second largest aluminium-producing country (responsible for 6% of global supply), with Rusal ranked as the second largest producing company in the world (and largest outside China). The U.S. historically has imported ~6% of aluminium material from Russia, with trade figures in August showing Russia as the third-largest trading partner for the material.
Is History Repeating Itself?
This is not the first time that the U.S. has threatened to sanction Russian aluminium, with the Trump Administration announcing sanctions on major shareholder and non-executive chairman of Rusal (Oleg Deripaska) on 6th April 2018 (citing Russia’s “malign activities”). However, in January 2019, these sanctions were lifted upon Mr. Deripaska stepping down from the board of Rusal and lowering his stake of parent company EN+Group (in addition to industry pressures from downstream producers within the U.S. and Europe).
Our View
While it remains uncertain whether the U.S. will move forward with sanctions to target Russian aluminium, we would expect that the impact (if sanctions are implemented) to be short-lived for LME prices, given that the U.S. could find alternative trading partners to fill the gap (such as China). However, where more issues will lie is if LME (or Europe) follow suit, given not only Europe’s much higher reliance on Russian aluminium than that of the U.S. (13% versus 6%), but more limited alternative supply sources. We expect this move by the U.S. to be a solely political decision, given that downstream U.S. aluminium fabricators earlier this year lobbied to increase U.S. imports (by removing section 232 tariffs), as high operational costs were hurting margins. On the hand, U.S. upstream producers (such as Alcoa Corporation – the largest U.S. aluminium producer), formally wrote to the LME last month, asking them to move forward with a ban on Russian material on the Exchange (citing fears that Rusal would increase warehouse inventories on reduced sales demand, which could in turn pull down global prices).
Aluminium Market Fundamentals (Pre U.S. Sanctions)
• We forecast the aluminium market to remain in deficit in 2022, with supply risks (in Europe and China) more than offsetting a falling demand profile.
• As much as 1.1Mt of capacity has come offline in Europe due to falling smelter profitability (please note, Europe makes up ~16% of global production). Meanwhile, within China, power rationing caused by hot weather in Sichuan and Yunnan are key drivers behind lower than anticipated production this year (although we still forecast a record year of Chinese output).
• Demand weakness will be driven by an inflation-led ex-China slowdown, in addition to a weak Chinese construction sector. Please note, our previous forecasts for an automotive rebound in 2022 is unlikely to materialise, upon extended supply chain issues.
ALUMINIUM MARKET BALANCE
Source: CRU, Bloomberg, StoneX
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