US sanctions cheer aluminium shares but geopolitical risks can bite both ways
Investors should watch for United Company Rusal’s moves to protect its interests, Russia’s moves to circumvent these sanctions, and sharp increases in aluminium output elsewhere in the world
When superpowers quarrel, looking for a silver lining is a risky strategy. Yet, investors in aluminium shares are pumped up after the US imposed sanctions on United Company Rusal Plc, which sent aluminium prices soaring.
On Monday, cash aluminium prices increased 6.6% on the London Metal Exchange (LME) and rose in early trades on Tuesday too. Shares of Hindalco Industries Ltd are up 7.5% since Friday, and those of National Aluminium Co. Ltd 2.6%. Vedanta Ltd’s shares were relatively unchanged, perhaps due to aluminium being only one of its several divisions. Investors are anticipating Rusal’s misery to be an advantage for Indian producers.
They should remember that the US was also the reason why aluminium prices fell since March (see chart), after it imposed import tariffs on steel and aluminium. Although US aluminium premiums (payable for quicker delivery) rose, LME prices fell in anticipation of a slowdown in imports to the US. The prime motive for these tariffs was to increase domestic production of aluminium in the US.
The chart alongside shows that the Russian sanctions have seen aluminium prices rebound, regaining lost ground. The recovery is based on anticipation that the sanctions will result in Rusal’s output declining as it will find it difficult to do business, and that will lead to a supply deficit.
The price recovery assumes Rusal will be forced to cut output, as it will be unable to find buyers. Bloomberg reported that international trading houses have stopped buying from Rusal due to the sanctions. The company will do its best to find alternative buyers. Whether a large user of aluminium such as China steps in to buy some of Rusal’s output remains to be seen. If that happens, then the supply situation may not be as tight as envisaged.
Another risk is producers elsewhere ramping up output to fill the gap. That could take time though, so in the near term aluminium prices may find support. Reuters reported that Rio Tinto will be one of the chief gainers, as it will be able to supply aluminium from its Canadian and Australian operations without paying the 10% import tariffs, as these countries have been exempted by the US.
In the near term, the increase in aluminium prices is positive for Indian producers. However, reports indicate that this will increase the costs for US aluminium can producers, which could be a worry for Hindalco’s US operations. Although aluminium prices are passed to customers, it is done with a lag and can affect near-term performance. Novelis Inc.’s management commentary after its March quarter results should give a better idea of their expectations after this development.
Apart from one eye on aluminium prices, investors should watch for Rusal’s moves to protect its interests, Russia’s moves to circumvent these sanctions (or patch up with the US) and sharp increases in aluminium output elsewhere in the world. America’s continuing efforts to increase its domestic aluminium production remains a risk. Geopolitical risks have a way of biting when you least expect it, and domestic investors may have gained from these sanctions now but should be on guard.
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