U.S. sanctions on Rusal threaten aluminum turmoil: Andy Home

　　Deripaska was on the U.S. Treasury Department’s sanctions list, covering seven Russian oligarchs, 12 of their companies, 17 Russian government officials, a weapons trading company and a bank.

　　The aluminum market has already reacted.

　　The London Metal Exchange price has jumped from a Friday low of $1,987 per tonne to a high on Monday morning of $2,144.

　　U.S. physical premiums are surging again, with the CME May contract spiking to 18.0 cents/lb on Friday, exceeding the previous tariff-fuelled peak.

　　This may just be the start as the market collectively tries to figure out what happens next to one of the biggest sources of trading liquidity in the global aluminum market.

　　SHARE PRICE HIT

　　The first casualties of Deripaska’s inclusion on the U.S. Treasury’s sanction list announced on Friday have been the share prices of EN+ and Rusal.

　　EN+ Group, Deripaska’s London-listed holding vehicle, has dropped 48 percent since its Friday opening.

　　It holds a 48.13 percent stake in United Company Rusal, which has experienced a similar-sized collapse in its Hong Kong-listed share price.

　　Both companies have warned of the sanctions that “it is highly likely that the impact may be materially adverse to the business and prospects of the Group”.

　　Rusal has added the U.S. action “may result in technical defaults in relation to certain credit obligations of the group”.

　　A BIG PHYSICAL SHORT?

　　If import tariffs started closing the door on the flow of Russian aluminum to the United States, sanctions have just slammed it shut.

　　Russia was the second-largest supplier of unwrought aluminum to the U.S. market last year, accounting for almost 700,000 tonnes of the country’s total imports of 5 million tonnes, according to the International Trade Centre.

　　Russia has not made it onto the list of countries winning exemptions from the 10 percent import tariff, unsurprisingly since it was one of five countries identified as either benefiting from state subsidy or being a “potentially unreliable” partner.

　　The Midwest U.S. aluminum premium has been a useful market barometer of tariff politics in the last few weeks and has shot higher again.

　　Since, to quote the Treasury Department, “U.S. citizens are generally prohibited from dealings with” sanctioned entities, the local aluminum market would seem to be several hundred thousand tonnes physically short of units.

　　The effects of these sanctions, however, extend far and beyond the United States.

　　That’s because, again to quote the Treasury Department, “non-U.S. persons could face sanctions for knowingly facilitating significant transactions for or on behalf of the individuals or entities blocked today”.

　　That poses a specific question of resources giant Glencore, which is an 8.75 percent shareholder in Rusal and the market outlet for much of its commodity-grade metal.

　　Indeed, Rusal’s accounts state that last year sales of primary aluminum and alloys to Glencore were $2.431 billion out of total segment sales of $8.324 billion.

　　How Glencore handles the sanctioning of one of its core suppliers is a key unknown in the current equation.

　　The broader question is how many others in the supply chain will be happy to continue taking Rusal material. What is a “significant transaction”?

　　The question will take on extra sensitivity in those countries that are simultaneously lobbying the U.S. administration for exemptions to the new aluminum tariffs.

　　In just about every other industrial metals market, the metal displaced from the United States and, possibly, other countries would most likely wash up on China’s shores.

　　It is, after all, the world’s largest buyer of most things metallic.

　　Just not aluminum, because China itself is the world’s largest producer and indeed one of the targets of the U.S. import tariffs because of its exports of semi-manufactured products.

　　SHIFTING LME SPREADS, SHIFTING OWNERSHIP?

　　Well, there’s always the market of last resort, the London Metal Exchange (LME).

　　Except that here too the ramifications of sanctions are making an impact.

　　A significant part of the LME’s aluminum stocks may be Rusal brand.

　　As of the end of March 2017, the most recent annual update from the LME, metal from “Eastern Europe” accounted for 44 percent of total aluminum stocks.

　　The percentage has probably gone down since then and the LME has said it has no immediate plans to change the listing.

　　“It is for individual stakeholders on the LME to determine if particular brands are acceptable for their use given their legal or regulatory framework,” the exchange said in a statement.

　　“Individual stakeholders” may already have made their determinations, judging by some sharp shifts in time-spreads on Monday.

　　“Tom-next”, the cost of rolling a position from Tuesday to Wednesday, whipped into a $4-per-tonne backwardation on Monday morning.

　　The three-months-to-December-18 spread has tightened from a contango of $18.00 at Friday’s close to a current $11.00 per tonne.

　　Such time-spread action suggests some large positions are being shifted around.

　　U.S. players are likely looking to offload any exposure to Russian aluminum, but, in the absence of a lack of legal clarity at this stage, there may be plenty of non-U.S. entities doing the same on a “just in case” basis.

　　Meanwhile, bank compliance officers will no doubt be scrutinizing the Russian aluminum that is being stored in off-market warehouses.

　　Will banks financing these deals now insist on the metal being re-warranted in LME warehouses for security? Should the market expect an influx of aluminum?

　　Or will traders grab as much of the non-Rusal stock in the LME system and move this more marketable and valuable metal off market?

　　Answers on a postcard at this stage.

　　SHOCKWAVES

　　There’s only one historical precedent for this in the aluminum market: the U.S. sanctions against Iranian producer Iralco imposed in 2012.

　　But Iran was never as large a producer of aluminum as Rusal and the amount of stock in the LME system wasn’t anywhere near as significant.

　　At the very least these sanctions are going to cause major changes in physical aluminum flows around the world, which is why the Midwest U.S. premium is on a charge.

　　But the way the more international LME contract is behaving suggests the shocks may be more global.