Rusal Sanctions Deadline Looming

As the Oct. 23 deadline approaches, the aluminum market is taking no risks on continued supply from Russia’s Rusal, Reuters reports.
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The industry traditionally gets together in Berlin this week to negotiate annual supply contracts for 2019 with billet makers, rolling mills and casting plants rubbing shoulders at a conference known, as Reuters notes, as the “mating season” … except one stag in the herd has been shut out.
European customers will avoid 2019 supply deals with Rusal. “We can’t agree a deal with Rusal on the basis that sanctions will be lifted by Oct. 23,” a Rusal customer in Europe is quoted by Reuters as saying, adding “Anyone that has a relationship with Rusal will be preparing for the sanctions to remain in place for now.”
The aluminum market has so far been relaxed about the fallout from Rusal being placed under sanctions at the beginning of April once a stay of execution was granted later in the month. The expectation has been the sanctions would be lifted in October.
But over the last week or two, doubts are being raised and the fear factor is dissuading buyers from taking the risk.
This is no small issue for the industry, although the market has since had time to adjust to the idea. The reality is the aluminum supply market is in deficit and Rusal still contributes some 6% of global supplies.
Even if sanctions are somehow avoided next month, Rusal will be without its normal quota of annual supply contracts, forcing it to sell on the spot market. Reuters suggests this will contribute to volatility next year, even if the market can access all the metal it needs.
But if Oleg Deripaska fails to sufficiently distance himself from Rusal and En+, such that sanctions are applied as currently expected, expect physical delivery premiums in Europe to rise again and for considerable disruption to the supply market next year. You cannot take nearly 4 million tons a year of metal out of an already tight market and not expect there to be casualties.
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The industry’s calm over the summer is going to be tested in coming weeks as the deadline approaches. Even if sanctions are avoided, the result of Rusal being left with only a spot market next year will in itself contribute to volatility buyers could do without.