Aluminum and alumina market dynamics have turned favorable after recent events, leading to supply vacuum of 2.8mtpa of metal (Rusal and Hydro) and 8mtpa of alumina (from the world’s largest alumina refinery in Brazil owned by Hydro, and alumina refineries of Rusal in Ireland, Ukraine and Jamaica).
Aluminum and alumina market dynamics have turned favorable after recent events, leading to supply vacuum of 2.8mtpa of metal (Rusal and Hydro) and 8mtpa of alumina (from the world’s largest alumina refinery in Brazil owned by Hydro, and alumina refineries of Rusal in Ireland, Ukraine and Jamaica). US Rusal (Rusal) has been hit by the US sanctions, leaving it unfit for trading. Rusal accounted for nearly 6-7% of the world’s aluminum production, most of which was exported, as local consumption in Russia is very low. Rusal can at best produce 1.5mtpa of metal, as it has only ~3mtpa of alumina capacity in Russia, which means nearly 2.5mt metal supply reduction from the global market.
Rusal was also selling 2mtpa and buying 1.5mtpa of alumina, with net long position of 500kt before the US sanctions. Rusal owns about 4.8mtpa of alumina capacity in Ireland, Ukraine and Jamaica, whose operations are at risk. Alunorte (owned by Hydro), the world’s largest alumina refinery with capacity of 6.2mtpa in Brazil, has been forced to operate at 50% capacity, as heavy rains have posed the risk of tailing dam breach and contamination of river water.
Although an independent investigation has not found any contamination, it is only natural for the Brazilian authorities to turn cautious after having seen devastation from breach of Samarco’s tailing dam a few years ago. Hydro has also cut 230kt metal capacity at its smelter, Albras, in Brazil, and announced force majeure for alumina supply.
As transporters and shippers have stopped dealing with Rusal, the total supply chain disruption is much larger than the production disruption. This has led to a sharp run-up of 27% in LME and 29% in alumina prices (since beginning April). Apparently, China remains largely unaffected, and thus, metal prices on SHFE have increased by only 11%.
It is understood that Rusal can supply metal to China as most of its production is located in Siberia, but exports will be much smaller at 500-700kt, as against 3mtpa in 2017. We believe Rusal will be forced to shut down its 2.5mtpa pots and abandon new projects immediately because it will not be able to source alumina from its refineries outside Russia.