Investors in aluminium stocks became the proverbial trampled grass when elephants fight. Those who bought shares of companies such as Hindalco Industries Ltd and National Aluminium Co. Ltd after the US imposed sanctions, hoping to profit from higher aluminium prices, are the worst affected. Existing investors only saw paper gains increase and decline.

Is this the end of the aluminium rally? Unfortunately, there’s no straight answer. For instance, when the US imposed sanctions on 6 April on United Company Rusal Plc, the market gauged the initial impact as severe. The weeks that followed resulted in the severity levels being raised, as the inter-linkages in the aluminium supply chain resulted in disruptions.

Spot aluminium prices rose by a fourth to cross $2,500/tonne in this period but analysts at Goldman Sachs expected this could touch $3,000/tonne too.

That prospect seems distant now, with aluminium prices falling by 7% on Monday and ruling weak on Tuesday too.

What has changed? The developing situation was looking dire for Rusal.

The US government has now said it does not want to hurt the people who work for Rusal and has signalled if Oleg Deripaska gives up control over Rusal, they would be inclined to lift sanctions.

This is easier said than done but opens the possibility of an end to sanctions. This will then mean a return to status quo before sanctions were imposed and one can expect prices to fall, other things remaining the same. A Bloomberg report said Goldman Sachs expects a restructuring of Rusal’s assets as the likeliest outcome.

While a sale or restructuring is some time away, the more immediate relief is an extension till 23 October and clarity on what transactions are allowed, which include winding down of operations and also allowing pre-existing contracts by non-US entities to continue as long as the amounts were paid into blocked accounts.

Just as the severity of the initial sanctions became clear in the weeks that followed, the effect of these concessions too will become known in time. Companies will deal with Rusal only if they are confident these transactions will not in some (yet unknown) way fall foul of the US sanctions.

If the concessions see trade flows improve, especially in alumina, then prices could fall sharply. Prices of aluminium and alumina are likely to be volatile as these events play out.

A pullback in prices of aluminium means a moderation in gains for Indian producers such as Hindalco and Vedanta Ltd. Lower alumina prices will mute Nalco’s gains. While the US sanctions are significant enough for investors to take notice, making investment decisions solely on that basis can end badly.

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