Via Ag Metal Miner
A potential aluminum shortage could be rearing its ugly head once again. This will prove especially true if the U.S. goes ahead with a proposed move to shut out all Russian aluminum unilaterally. Currently, the plan is to accomplish this via a tariff of up to 200%.
Thus far, Russian metal producers have largely evaded the imposition of sanctions related to the country's invasion of Ukraine. That said, they have been hit by increased tariffs across the EU. Moreover, the inability to make financial transactions has encouraged many consumers to self-sanction. This has effectively shut Russian metal out of Europe, at least in terms of direct shipments.
While the U.S. only imports some 12% of its metal from Russia, that still represents over 200,000 tons a year. To drop Russian supply entirely, the U.S. would have to start purchasing more Middle Eastern metal. Of course, this comes with higher freight rates and puts the U.S. in competition with European buyers, making a possible aluminum shortage scarier. Indeed, physical delivery premiums in Europe have likewise been moving up this quarter. According to Reuters, duty-paid premiums on the LME rose to $310 per ton from $254 per metric ton in early January.
The only region with a surplus of metal is Asia, where main Japanese port premiums have eased from $99 last quarter to $88-89/ton. According to the same Reuters post, this represents the fifth straight quarterly decline. Essentially, this means that Asia remains well supplied by Chinese exports of semi-finished products. And while Chinese smelter output is up, there are also record inflows of cheap Russian ingot coming in. Clearly, displaced production from Rusal has had no problem finding a home among Chinese consumers.
Last year there were rumors that the LME may ban Russian metals causing a massive aluminum shortage. At the time, the decision hinged on fears that Russian metal may flood into the LME as a market of last resort should sanctions shut Russia out of global trade. In the end, the LME decided not to proceed with an outright ban, preferring to follow government guidelines regarding sanctions. In the interim, the flood of Russian metal has yet to materialize.
That said, significant deliveries are beginning to turn up in Asia. The above post reports details nearly 110,000 tons delivered into Gwangyang in South Korea this month by Glencore. This is a portent of what's to come if China cannot absorb all the metal Rusal is pumping out.
It remains to be seen if this is indicative of a disconnect between the LME (increasingly Russian in makeup) and global non-Russian market prices. In the end, it will depend on how deliveries increase over time. Certainly, the trend holds the potential for the LME's aluminum price to decline below the global average. This would be similar to how the LME's nickel price continues to diverge from the global nickel market, albeit the reasons would be different.
Take the fact that the LME 3-month aluminum price has eased since earlier this month, yet the M.W. premium has increased. This is evidence that, while demand is expected to ease in the face of recessionary pressures, metal remains tight and an aluminum shortage is possible. Meanwhile, the rising M.W. premium suggests consumers are concerned they could end up trapped between cooling demand and rising input costs. Ultimately, this could put processors under margin pressure in the months ahead.
By Stuart Burns
More Top Reads From Oilprice.com:
Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive… More