By the end of last week, aluminium prices had lost 10.5% over the previous week’s close on the London Metal Exchange. Now, the metal is 12% below its level on 5 April, a day before the US sanctions on United Company Rusal Plc were announced. The sharp rally in aluminium prices after sanctions has begun to unravel.
Last week’s decline came after the US softened its stand on sanctions on Rusal, giving time till 23 October for existing long-term contracts to continue, and also offered a way out of sanctions if Oleg Deripaska relinquished control over Rusal.
While there were questions being raised on whether he would agree, on Friday, EN+ Group Plc—which owns a 50% stake in Rusal—said that Deripaska has agreed to lower his stake in EN+ to below 50% and resign from its board. Whether this satisfies US authorities is one thing, but it sets the stage for negotiations to lift sanctions on Rusal.
The US government has said it does not wish to harm the employees of Rusal and its subsidiaries. How soon a solution emerges remains uncertain but signs indicate progress.
If sanctions are lifted completely, that could mean further downside risk in the near term to aluminium prices.
While some weakness in prices can be expected, it is unlikely to be a slump for long. Consider Alcoa Inc.’s outlook on aluminium, which does not include the impact of sanctions. Alcoa projected a deficit in aluminium and alumina for 2018. In aluminium, it expects global demand to increase by 4.25-5.25% but delays in smelter expansion to limit supply, leading to a deficit of 0.6-1 million tonnes.
The market situation itself points to a tighter market for aluminium. Since prices were in a flat range in early 2018, one could have expected prices to increase, but not to this extent and not so quickly. Also, remember that the US had recently imposed trade tariffs, which is another story that is playing out. Countries are seeking exemptions and how this affects prices also remains to be seen.
All these indicate a volatile price situation in the near term, with several factors influencing prices. While the original shape of US sanctions was a squeeze that could have kept prices up for long, this outcome is looking less likely.
Domestic investors in aluminium company shares should go back to paying more attention to market fundamentals. Here, the longer run appears to indicate a bullish outlook for aluminium but having run-up sharply post-sanctions, the shares may display some weakness. The shares still trade above their levels before sanctions were imposed.
A prevailing tight supply situation in alumina may prevent National Aluminium Co. Ltd’s price from falling sharply. But aluminium producers’ shares could face some heat. Once companies report their results, their profitability trends, impact of a weaker rupee, outlook on input costs, volume growth and capacity expansion are some factors that will play a bigger role in determining how valuations change.