LONDON, March 21 (Reuters) – Australia’s decision to ban exports of alumina to Russia tightens further the raw materials squeeze on Russian aluminium giant Rusal . read more

The company’s four million tonnes of smelter capacity each year processes eight million tonnes of alumina, which sits between bauxite and refined metal in the aluminium production chain.

Rusal’s domestic alumina plants accounted for only 37% of its smelter needs last year. The balance was imported. The top two suppliers were Ukraine, where Russia’s invasion has closed Rusal’s Nikolaev refinery, and Australia.

The company said it is “currently evaluating” the loss of its number two raw material supplier but the market has already reacted to the potential resulting loss of Russian metal.

London Metal Exchange (LME) three-month aluminium jumped more than 5% at its opening to $3,554 per tonne on Monday morning and was last trading around $3,545.

RAW MATERIALS SQUEEZE

Rusal has so far escaped direct Western sanctions thanks to the deal that was done to lift U.S. sanctions in 2019. Rusal’s oligarch owner Oleg Deripaska remained blacklisted but Rusal was excluded after he reduced his controlling stake in the EN+ holding company.

That may just have changed, though.

The Australian government’s ban, expedited to stop a Russian-bound alumina shipment leaving this week, doesn’t explicitly name Rusal but it is a de-facto sanction on the company that dominates Russian aluminium production.

The status of Rusal’s 20% stake in the QAL refinery in Queensland is highly moot since it now can’t export its offtake share and its partner Rio Tinto (RIO.L) is committed to disengaging from all Russian joint ventures. read more

Rio has already suspended a tolling arrangement with Rusal’s Aughinish alumina refinery in Ireland, forcing the Russian producer to redirect bauxite shipments from its Guinea mines.

Such self-sanctioning limits Rusal’s room for manoeuvre in terms of replacing lost Australian feed.

The sea-borne alumina market is dominated by Rio Tinto, U.S. producer Alcoa (AA.N) and Norway’s Hydro . All three have said they will reduce exposure to Russia or, in the case of Hydro, not enter into new contracts with Russian entities.

The biggest question mark of all hangs over the Irish refinery, Rusal’s largest overseas alumina plant with production last year of 1.9 million tonnes.

Only a quarter of its output flowed to Russia in 2021, meaning there is plenty of potential to redirect shipments from Europe to Russia.

The Irish government is understandably keen to keep Aughinish operating but the European Union is already extending sanctions into the metals arena with a ban on Russian steel imports and will have no doubt noted Australia’s upping of the sanctions ante.

With or without its Irish lifeline, however, Rusal is facing a raw materials squeeze.

China may be its answer but China has itself been importing significant amounts of alumina in recent years to keep up with demand.

Even assuming the political will to supply Rusal with alumina, the market incentive may not be there, given expectations of rising domestic alumina demand as Chinese smelters lift output after an easing of power controls.

ALUMINIUM SQUEEZE

The aluminium price’s reaction to news of the Australian ban tells you how concerned it is about the potential loss of Russian metal production.

As the Australian Foreign Ministry helpfully pointed out in its statement, “aluminium is a global input across the auto, aerospace, packaging, machinery and construction sectors”.

Which is a real problem if the West is losing access to Rusal’s four million tonnes of annual production.

The aluminium supply chain was already creaking. Power-efficiency constraints have turned China, the world’s largest producer, into a net importer of unwrought aluminium to feed its massive downstream products sector.

Production at Europe’s power-hungry smelters has been falling due to high energy prices, a phenomenon that has only gotten worse since Russia launched on Feb. 24 what it calls a “special military operation” to disarm and “denazify” Ukraine.

Visible aluminium stocks have been sliding steadily for over a year to plug the supply-chain gaps. Total LME inventory stands at 704,850 tonnes, the lowest level since 2007.

The global aluminium market is tight, the Western European market particularly so, both because of the recent smelter cuts and its dependence on Russian supply.

Europe accounted for 41% of Rusal’s sales last year and disruption to Russian shipments will only widen the region’s existing supply deficit.

Moreover, Rusal is a critical supplier of “green” – low-carbon – aluminium from its hydro-powered Siberian smelters.

While global aluminium trade flows may eventually adjust in the wake of the Ukraine crisis, automakers keen to use only the greenest metal in their next-generation electric vehicles may find a far more challenging supply landscape.

TIGHTENING THE SANCTIONS SCREW

The complexity of Rusal’s raw material supply web was exposed back in 2018 when U.S. sanctions set off a chain reaction that spanned Ireland, Guinea and Australia and ended with European car companies lobbying the European Commission to intercede with the United States.

Those U.S. sanctions were a bolt from the blue.

This time around the effect has so far been more incremental as supply, logistics and financing avenues dwindle due to self-sanctioning.

The Australian government’s move to add alumina to the sanctions list marks a significant escalation in this process.

Critical for Rusal and aluminium market alike is whether other countries follow suit.

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Emelia Sithole-Matarise

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.