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Sanction worries spark fresh inflationary concerns for aluminium makers

Any ban on Russian aluminium would likely have significant ramifications for metal markets around the world.

October 04, 2022 / 10:01 PM IST

A discussion paper published by the London Metal Exchange (LME) has triggered concerns of an inflationary spiral in the price of aluminium and of receding demand for the metal as a consequence.

LME, the world’s oldest and largest market for trading industrial metals, said on September 29 it was considering a consultation on whether Russian aluminium, nickel and copper should continue to be traded and stored in its system.

On the same day, the benchmark aluminium price on the LME jumped 8.5% to $2,305 per tonne on prospects of supplies of the metal being hit. The price pared some of the gain.

To be sure, an article by Reuters suggested that LME could not ban Russian metals without sanctions being slapped on the companies that manufactured them. Even so, the jitters couldn’t be wished away.

Metal markets

Metal prices surged in the aftermath of Russia’s February 24 invasion of neighbouring Ukraine, which provoked Western sanctions against the Vladimir Putin regime, as global supplies dwindled. Prices and supplies have since stabilised.

“This (LME’s potential ban) could have significant ramification for the global metals markets,” Bloomberg reported.

The US, for instance, relies on a steady flow of imports from Russia, the world’s second biggest aluminium producer, for supplies of the metal that goes into manufacturing everything from automobiles to aircraft and appliances.

“The inability to trade Russian aluminum would impact supply and would have predicable effects on the industry,” president of the Aluminium Association of the United States, Charles Johnson, said at an industry event in Washington.

In 2018, US buyers scrambled after the Donald Trump administration announced sanctions against Moscow-based United Co Rusal, the largest producer outside China, which led to a spike in aluminium prices.

Aluminium has been spared the metal price volatility caused by the Russia-Ukraine conflict. Its price has lost 36.03% on the LME over a six-month period and slid 22.12 percent in the year to date.

Immediate impact

“Any ban on Russian metals will inflate aluminium prices in the immediate term,” said Vikash Singh, institutional equity research analyst at Phillip Capital.

“However, as seen in the past, Russian companies have been able to divert material in the market despite bans and therefore in the medium term this measure isn’t expected to impact overall supplies in the market as the same material will move somewhere else and eventually find its way to European customers. Therefore, aluminium prices would not remain elevated for a long period,” he told Moneycontrol.

Considering receding demand pressure and the possibility of a recession in the West , base metals prices will move sideways for sometime, Singh added.

In a report dated September 30, Goldman Sachs warned that any ban on Russian metals would stoke inflationary pressure in Europe.

Across the globe, including India, economies and manufacturers have already been struggling in the face of higher energy prices. Elevated energy and commodity prices have stoked inflation in key aluminium-producing markets.

India scenario

In an interview to Moneycontrol after declaring first-quarter results, Hindalco’s managing director Satish Pai said he expected “the upstream margins (aluminium) to sharply contract in the second quarter of the financial year because of higher coal costs, particularly the impact of which has been felt more towards the months of May-June.”

The potential cost inflationary scenario beyond Q2FY23 may also throw off some projections by credit rating agencies.

ICRA, in an early September report, said it expects profitability of the industry to be hurt in the first half of FY23, but expects some improvement in H2 owing to the easing of cost pressures due to better availability of coal.

Cost inflation and receding demand definitely do not augur well for the industry, but an aluminium price hike, if at all, may cap losses.

CLSA said in a report dated September 30 that it remains positive on the medium-term prospects of the Indian aluminium industry, but suggested that near-term uncertainty remains.

It cited uncertainty around Russian supply, a potential cut in Chinese production and lower demand from the rest of the world as the moving parts of the puzzle.

The brokerage suggested that the negatives seem to be priced in at least for Hindalco, whose share price has tanked as much as 18 percent over the last one month.

Apart from possible sanctions on Russian metals and supply chain issues, the aluminium industry is also confronting demand uncertainty.

US-based Ball Corporation recently lowered its growth guidance for North America by 2 percentage points. It’s the largest customer for the beverage can sheet produced by Novelis, a subsidiary of Hindalco.
Nickey Mirchandani Assistant Editor at Moneycontrol covering Materials and Industrials space which includes Metals, Cement and Infrastructure sector. She’s a presenter and a stock market enthusiast with over 12 years of experience who loves reading between the lines and scanning through numbers. Before joining Moneycontrol, she was an Associate Research Head at Bloomberg Quint/ BQ Prime, where she wrote analytical pieces, anchored multiple interviews and a show called “ Market Wrap”.
first published: Oct 4, 2022 10:01 pm