A big overhang on aluminium has been lifted but has left prices trending lower. That could worry investors in Indian producers of the white metal. But a clearer picture will emerge in the following months and quarters, once there is clarity on other issues such as US-China trade talks.
On January 28, three-month aluminium futures on the London Metal Exchange declined by 2.7%, said Reuters. This was after the United States lifted sanctions on UC Rusal and its parent company EN+. The move came after these companies were able to show that Rusal’s main shareholder Oleg Deripaska had lowered his stake in these companies and relinquished control.
The decision means Rusal’s position in the global aluminium supply chain, which had come under threat after the imposition of sanctions in April 2018, will be restored. The LME said its members can freely enter into contracts with Rusal and its entities, and that warranting can be resumed in Rusal metal. Warrants signify metal stored in LME warehouses.
But the US government has got Rusal to agree to ‘unprecedented transparency for Treasury into their operations by undertaking extensive, ongoing auditing, certification, and reporting requirements.’ Thus, the US government will continue to watch over Rusal’s activities.
While the sanctions were imposed in April last year, these were eased after the group laid out a roadmap to lower Deripaska’s interest. Thus, to a large extent, aluminium prices already reflect the expectation of sanctions being removed. Since June, prices are down by nearly a fifth.
Another notable overhang is the partial shutdown of operations at Norsk Hydro’s Alu Norte alumina refinery. It has been operating at half its capacity after having violated environmental norms. Recently, Reuters reported the Brazilian government has lifted the embargo on its production but normal output will begin after a federal court allows it to do so. When reopened, alumina supplies will improve and prices should moderate.
The one major uncertainty that remains are the import tariffs imposed by the US and related to that, the effect of the trade talks between the US and China. If trade tensions ease, that should be good for aluminium in the longer run.
The Chinese economy too has been slowing down, faster than expected, which is said to be one reason why aluminium prices are keeping low. A slowdown in the European Union and the International Monetary Fund’s (IMF) predictions of slower global economic growth are risks for this industrial commodity. On the other hand, the global aluminium market is still expected to remain in a deficit state in 2019, according to Alcoa. Inventories too have shrunk.
That lends to confusing signals, as both factors put together indicate that prices could bounce back. What can be said is that once these macro uncertainties end, then the market will return to a more normal state. For instance, some of the shrinkage in inventories may be because Rusal inventory could not be stored there, and may have been stored off-market. When it returns, LME inventories may go up.
While the lifting of sanctions has a sentimental impact, there’s no sword hanging over Rusal now. Since there’s no threat from sanctions any more, prices eased a bit. Softening of alumina prices, if the Alu Norte refinery goes back to full capacity, will benefit those global aluminium producers who buy alumina to make aluminium.
Most Indian producers run integrated operations, with some alumina purchases as required. In fact, National Aluminium Company’s alumina business is what contributes to profits, with the aluminium business making losses. A decline in alumina prices is a risk for the public sector company.
Others such as Hindalco Industries and Vedanta are already facing a situation where the decline in aluminium prices is expected to affect their profitability. Costs are not falling as rapidly. In recent months, the industry has been demanding higher import duty on aluminium to protect domestic producers. On January 28, all aluminium shares were ruling lower though some of that can be attributed to the metals pack itself falling.
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