The LME 3mth alu price has bounced 4.5% past two days but its a far cry from 2022 impacts. The 3mth aluminum price has bounced 4.5% (+96 USD/ton) to USD 2256.5/ton on news that the EU is considering an embargo on Russian aluminum. It’s a notable gain amid an otherwise lukewarm and bearish energy complex where natural gas and coal prices have been trending steadily lower since October last year. But it is nothing compared to what happened in 2022 when Russia attacked Ukraine. The 3mth aluminum price then rallied to USD 3849/ton and the EU aluminum premium rallied to USD 505/ton versus a more normal USD 100/ton. Thus so far the the price action in aluminum is nothing like what we experienced in 2022.

It looks likely to us that the EU will indeed impose sanctions on Russian aluminium. We don’t know yet if the EU actually will implement sanctions on Russian aluminum. Personally I think its likely that they will do it as it is kind of a moral stand and the last large piece of the Russian energy complex which is possible to place under sanctions. But the actual effects both on the EU and Russia will likely be limited. Russia will not stop producing and exporting aluminium. Rather it will export it and send it elsewhere in the world. That is what happened to Russian crude and product exports. They weren’t lost in terms of global supply, but rerouted elsewhere. 

New sanctions will have limited effect on Russia and dissipate over time. It’s a moral stand. Previously it was possible to enforce effective sanctions on one specific country. Those were the days when the US ruled the world and China chose to side with the US. For example with sanctions on Iran. These sanctions have not at all been lifted yet. But Iranian oil exports have rebounded from 1.9 m b/d at the low in 2019 to now 3.2 m b/d as China now is accepting to import Iranian crude oil and is placing less emphasis on the US.

The effect of sanctions have a tendency to deteriorate over time. Even when the US ruled the world and China played along. But sanctions today will leak massively if China isn’t playing along with what the EU and the US wants. And China isn’t playing along.

The goal is to hurt Russia’s income from aluminum exports. But the effect will be limited. The aim with the sanctions towards Russian oil, and now possibly also aluminum, isn’t to bar the supply from the global market. Rather the opposite. Neither the US nor the EU wants to put a stop to Russian raw materials exports as it could drive up the price of these globally which would hurt consumers and generate inflation. The aim is to keep exports flowing but to try to hurt Russian earnings from the exports. The same will likely be the case for the potentially upcoming EU sanctions on aluminum.

But even the ”hurt the income” strategy with a cap on the price of Russian crude and products has deteriorated over time. Russian Urals crude had a discount to Brent crude in 2022 of as much as USD 36/b and today it is only USD 12/b below Brent.

Russia has probably made contingency plans a long time ago. Russia has also probably made contingency plans for its aluminum exports as the risk has been there all along since 2022. Thus new EU sanctions towards Russian aluminium exports will likely be less of a shock today versus when all hell broke lose in 2022.

Europe has also already reduced its Russian imports of primary aluminium, to about 10% of its primary needs. A large proportion of imports are now increasingly coming from middle eastern producers.

EU alu premiums already rising along with Mid-East issues (Red Sea). Will rise further with sanctions. Issues in the region has pushed up freight costs, insurance costs and added transit delays and length of journey to Europe. A combination of these issues have already lifted the European premium. New sanctions on Russia will likely lift the regional premiums further.

The dirty details. How deeply is EU’s industrial supply chains embedded in Russian alu semies? The actual effects of new EU sanctions on Russian aluminum will be down to the dirty details. An important question is how deeply Russian semies, and prefabricated aluminum parts (which also looks to be sanctioned) are embedded and integrated in the European industrial system (supply chains). If the EU is deeply dependent of pre-fabricated aluminum parts from Russia, then it could be painful for EU to disentangle from these imports.

Sanctions = additional costs and frictions as global aluminum flows are rerouted. New sanctions will naturally lead to frictions and some added price due to that. Aluminum can of course be transported across the world. It is cheaper to transport it from Russia to Europe and that is why it historically has landed in the EU. But, if need be, due to possible EU sanctions towards Russia on aluminum, then Russia can and will send its aluminum to other global regions, maybe and possibly predominantly, to China. Then the EU can and must import more aluminum from other places instead. Probably the middle east and maybe from China

The Global LME 3mth price will likely rise only marginally as no supply is actually lost. Just rerouted. The price of aluminum across the world may increase a little bit due to such sanction-frictions but probably not all that much since there will not be any loss of supply and only added transportation frictions and costs.

EU aluminum premiums will naturally rise in order to attract non-Russian supply from further away. EU Alu-premiums should naturally increase in order to attract aluminum from further away. China will probably be able to import Russian aluminum on the cheap. So Russia will lose some income on its aluminum exports as it potentially has to cover transportation costs all the way to China and possibly an additional discount in order for China to take it. China may only import a lot of Russian aluminium if it can get it on the cheap. China can then export more as its country balance will improve and possibly export all the way back to Europe.

A weak macro-backdrop in Europe makes sanctions easier. The backdrop to all of this is very weak aluminum demand in Europe amid a bleak macro-picture. Disruption of Russian supply to the EU should thus be less painful than it otherwise would have been.

What to do with Russian alu stocks already in EU LME storage? Consume it or export it? A tricky question is what to do about all the Russian aluminum which currently is sitting at EU LME storage sites where it is constituting some 90% of aluminum stocks. If it has to leave EU LME storage sites due to sanctions then it may have to be sold at a discount in order to get it to flow elsewhere. Maybe it will create deep front-end contango is one speculation. A natural solution however would be that sanctions allows consumption of Russian aluminum currently in stock in the EU but bans new and further stocking of Russian aluminum. Then these Russian stocks would gradually be consumed and dissipate and instead gradually be replaced by non-Russian aluminum.

”Futures market can tighten quickly and spreads could rally.” The following is a comment from one of SEB’s metals traders: ”The futures market could get very tight very quickly following EU sanctions on Russian aluminum. Spreads could tighten aggressively until market reaches a new balance.”

The LME 3mth aluminum price rallied to USD 3,849/ton when Russia attacked Ukraine. Price has now gained a little (+4.5%) to USD 2,254/ton on possible EU sanctions.

Aluminum premiums across the world. EU premiums rallied to USD 505/ton and USD 615/ton (duty unpaid and paid resp.) in 2022 vs normal USD 100-150/ton. Now gained a little on Mid-East troubles and rerouting. Could rise much more on EU sanctions.

Russia probably has a normal, net export of alu semies and primary alu of around 3 m mtpa. This would normally be destined to Europe.