What goes up must come down, goes the old adage.
Although that adage does not always hold true, it has for aluminum this week following a change of tone from Washington.
According to the Financial Times, the U.S. Treasury made two important announcements this week, the first being that if Oleg Deripaska sold his stake in Rusal, it could cut or lift sanctions on the firm. The second announcement was a postponement until Oct. 23 for U.S. firms and those dealing with them to wind up their affairs with the aluminum producer.
As a result the perceived tightness created by Rusal effectively being frozen out of the market has evaporated — for the time being, at least — and the price has fallen back to the high $2,200’s, some 10% above the level aluminium was at before the sanctions were announced.
The Treasury’s move is seen as an acknowledgement that it misjudged the impact on America’s own aluminum market and the damage such a disruption to the supply chain was going to cause.
Not only did prices react strongly, but primary and downstream supply became extremely problematic, with some consumers unable to access metal and smelters questioning where they would source alumina. Alumina prices reacted even more sharply than aluminum, rising as much as 80% since the sanctions were introduced.
Treasury Secretary Steven Mnuchin was at pains to explain the target was Oleg Deripaska, not Rusal per se, and is hoping the latest move will drive a wedge between him and the company, allowing U.S. consumers to continue to access Rusal metal while achieving the original objective of penalizing Putin supporters.
The FT reports Deripaska controls 48% of the company, with another 26.5% owned Viktor Vekselberg (who was also on the sanctions list) and some 8.75% in the hands of Glencore.
The Treasury’s move may negate the need for Moscow to nationalize Rusal. While not openly admitting that option was on the table, it has been rumored and may yet be an option if Deripaska decides his only option is to exit from the firm. Chinese buyers are also said to be circulating, but for such a key Russian asset the Kremlin may not be too enthusiastic about that option. Deripaska now has some five months to act, which is a long time in politics and the metal markets.
Constraints remain, though, on the aluminium market. Both the U.S. and Europe are in deficit, and supplies from Brazil being temporarily reduced is not helping sentiment. But most would see the relaxation of tension around consumption of Rusal material as a pressure release valve that has taken the steam out price rises for now.
Previous talk of $2,800-$3,000/ton now seem unlikely in the short term. While aluminum remains in bull territory, much of the strength is probably baked into prices at current levels.