On April 6, the US Department of Treasury’s Office of Foreign Assets Control (OFAC) imposed sanctions against seven Russian oligarchs, their 12 companies and 17 senior Russian government officials, among others. The move was aimed at punishing Russia for its purported occupation of Crimea, alleged role in violence in eastern Ukraine and supply of weaponry to the Assad regime, and “malicious cyber activities”.
The entities included United Company Rusal, which is owned or controlled — directly or indirectly — by EN+ Group.
En+ Group is a Russian energy-related firm controlled by Oleg Deripaska. The Russian, who possesses Russian diplomatic passport and claims to have represented the Russian government in other countries, is being investigated for charges of “money laundering and being part of the Russian organised crime group”.
It was earlier believed that sanctions on Rusal would hurt its ability to complete new projects or ramp up existing capacities of 1.5-1.6 mt, which would restrict any new supply coming into the market.
Given China’s emphasis on environmental sustainability, this was expected to support aluminium prices in the near to medium term.
But the easing of sanction did not exactly go down well with investors as prolonged curbs would have hugely limited the global aluminum output due to interdependency of Rusal’s alumina supply chain with other entities, Kotak Institutional Equities said in a note.
The brokerage further said a sharp price rally in aluminium prices post Rusal sanctions reflects stretched aluminum markets outside China due to a widening deficit after years of under-investment even as global demand is growing at 5 per cent annually. The world ex-China markets were in deficit of 1.9 million tonnes in 2017 and the deficit is expected to go up in 2018-2019, the Kotak report said.
The US sanctions on Rusal are still continuing though chances are the sanctions may be relieved if Deripaska sells his stake.
According to the Kotak report, Rusal requires close to 7.2 mtpa alumina to maintain its existing aluminum output of 3.7 mn tonnes. The company sources about 4.5 mtpa of alumina from Russia and Ukraine and procures the balance from its refineries in Ireland and Jamaica.
It also sources 1.5 mtpa of alumina from external refineries through third party sourcing. Its alumina refineries such as Aughinish in Ireland (2 mtpa) source bauxite from Rio Tinto where production is at risk due to the supplier invoking force majeure, it said.
“We believe close to 1.5-2 mtpa of global aluminum output could be at risk of reduced output if sanctions continue,” the brokerage said.
Kotak’s assessment is Rusal’s aluminum output based on alumina availability within Russia and from Ukraine may be capped at 2.3 mtpa, from 3.7 mtpa earlier. It is expected to impact Rusal’s smelter in Sweden, besides causing a disruption in the alumina supply chain.