- sashimaalTop contributor
- Posts : 5785
Join date : 2014-02-28
(Bloomberg) -- The U.S. sanctions on United Co. Rusal that have sent aluminum prices surging should be great news for rival producers like Rio Tinto (LON:RIO) Group.
Spoiler alert: they’re not.
While Rio is the top miner of bauxite, the raw material that becomes aluminum, it’s dependent on Rusal for a key intermediate step in the process -- the conversion of bauxite into alumina. Rusal’s refining operations, which stretch from its Aughinish plant in Ireland to operations in Jamaica, are a vital cog in a global interlocking supply chain that’s now been thrown into chaos.
As producers like Rio hunt for new buyers for their bauxite and sources of alumina to feed smelters, the global chokepoint created by the sanctions means that many of the miners, refiners and smelters that should be benefiting from surging prices are actually facing challenges just to keep their operations running. For aluminum smelters, suspending operations is a worst-case scenario and restarting is very expensive.
Rio, the world’s second-largest aluminum producer outside China after Rusal itself, is evaluating what shipments or supplies it can reroute and assessing its stockpiles, according to a person familiar with the situation. The company may even have to mothball some plants if supplies can’t be found, said the person, who asked not to be identified because the deliberations are private.
Read more about the fallout from the U.S. sanctions on Rusal
"The market will remain very tight while long-term buyers of Aughinish look for potential solutions,” said Anthony Everiss, a senior consultant at CRU Group. “It’s a pretty nightmarish scenario for them. There’s not that much on offer in the Atlantic to fill that gap."
Alumina prices have already rocketed, jumping by more than a quarter in the last week and heading for a record high. Prices have been driven higher by a combination of the sanctions on Rusal, which was said to have declared force majeure on some shipments of the commodity Thursday, and production cuts at Norsk Hydro ASA’s giant Alunorte alumina refinery in Brazil, the world’s biggest. Force majeure allows contracts to be left unfulfilled.
Alunorte has been running at 50 percent since a late-February court order amid accusations that a rainstorm led to contamination of an Amazonian river, and any change in its output levels will be key for the global market.
India’s state-owned National Aluminium Co. is already seeing the benefit. The producer said it sold a 30,000-metric-ton cargo of alumina in a tender last week at $601 a ton, the most it’s sold a shipment for in 12 years. That’s enough to make 15,000 tons of aluminum.
Rio said Friday it was declaring force majeure on some contracts, essentially warning that it would no longer be able to sell bauxite to Rusal or buy alumina from it. Rio also alerted some customers that it would no longer be able to fill some aluminum commitments. The company said the supply contracts the force majeure applies to are not financially material.
At the center of Europe’s supply problems is the Aughinish alumina refinery on the banks of the Shannon Estuary, a short drive from the western Ireland city of Limerick. The Rusal plant buys bauxite that Rio mines in Guinea and sells to smelters across Europe. Irish Prime Minister Leo Varadkar met management of the plant over the weekend, according to local media reports.
Rio is not the only aluminum maker that’s been thrown into chaos. Producers around the world are now scrambling to find enough feedstocks. Liberty House, which bought a plant from Rio in Scotland in 2016, gets some supply from Rusal’s Irish plant. It’s also in the process of buying Rio’s Dunkerque plant in France, Europe’s biggest.
Liberty House is currently working on its own contingency plans to supply alumina for its Scotland plant, according to a person familiar with the situation, who asked not to be identified.
“In common with other producers we are reviewing the situation in the international aluminum supply chain but have no comment to make at this point,” Liberty House said. “We will update as and when appropriate. In the meantime it is business as usual."
While Rusal makes most of its aluminum in Russia, its alumina plants are more internationally spread, making them more vulnerable to the sanctions. The company refines almost two-thirds of its alumina outside of Russia and can refine 1.2 million tons of alumina at its Jamaica refinery and 2 million tons in Ireland. Other operations are in Ukraine and Australia.
“Rusal’s international operations are of significant importance to the aluminum supply chain,” said Mark Hansen, chief executive of metals trader Concord Resources Ltd. “With the alumina market already running tight, the situation has now become acute in the short term."