Last week, speculators bought up aluminum amid a $100/ton spike following news that LME aluminum may soon exclude Russian materials. The LME continues to review a ban that would keep Russian aluminum, nickel, and copper from the exchange.
A Reuters post illustrated the seriousness of the move, stating that Russia’s Nornickel accounted for 7% of global mined nickel production last year. This year, Rusal expects to supply roughly 6%.
It’s a callback to the US sanctions on Oleg Deripaska back in 2018, which resulted in a de facto ban on Rusal’s aluminum deliveries. The result was a massive spike in exchange prices. Therefore, the natural fear is an LME ban on Russian metal could have a similar impact.
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LME Aluminum Inventory Reversal
The LME Aluminum inventory increased by some 45,000 tons between August and September, reversing this year’s trend of falling stock. Reports indicate that most Russian metal continues to flow out of eastern seaports for delivery to Asian LME warehouse locations. Still, volumes remain modest at present.
The LME seems anxious to avoid the ongoing drain of non-Rusal aluminum in their warehouses being replaced solely by new deliveries of Rusal metal. Indeed, six months from now, the majority of warehouse inventory could be of Russian origin. This puts the LME at risk of seeing a future sanction or ban dramatically devaluing that stock. If this were to occur, the LME price would then cease to reflect the global market price, fundamentally undermining the LME’s raison d’etre.
However, the LME is not Russia’s sole outlet for metal. At this week’s annual Aluminum Exhibition in Dusseldorf, many complained about Russian metal flooding indirectly into Europe. Many attendees mentioned how this undermined the market, particularly for extruded products.
For instance, Turkey was Germany’s 6th largest foreign extrusion supplier last year. This year, it is its largest. But Turkish extrusion mills rely on unique methods to ensure success. The country simply imports cheap Russian natural gas and discounted Russian extrusions billets. It then produces finished extrusions and exports the product to its neighbors in Europe, where it has free trade open door access.
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Extrusion Manufacturers on Guard
Not surprisingly, many European extruders want answers. Not only do they continue to ask how this is allowed to happen, but also how much longer it will last. After all, the whole supply chain witnessed a catastrophic collapse in demand from H1 2022 to H2 2022.
The expectation for demand next year is even worse, with some fixed power contracts expiring at the end of this year. Meanwhile, Germany will almost currently go into recession, as will the UK. In short: most producers are hardly positive about next year. On top of this, H2 sales suffered from de-stocking over the summer, with distributors finding themselves significantly overstocked and facing softening prices. Some markets dumped inventory to bring cash flow pressures down amid rising interest rates.
One extrusion mill speaking to MM on the basis of anonymity expressed deep concern. The source reported their mill sought to cut weekend shifts and lay off full-time workers for next year when orders plunged in Q4. They also moved from full capacity in Q1/Q2 to less than 50% capacity today. The German government announced an energy price cap to cover industrial users. However, as in the UK, high prices continue to do damage. Many producers suffered cutbacks while some smelters decided to implement part-time or full-time shutdowns.
Manufacturing with Winter Energy Rationing
The hope is that the industry will limp through the winter without rationing. However, the long-term impact of high power costs will firmly embed imports from lower-cost sources into the market landscape. This, in turn, will make the resurrection of full supply harder for domestic producers and processors in the years ahead. This may not be the “de-industrialization of Europe,” as some doom-mongers have proffered. However, we continue to see headwinds that the continent’s industrial sector has not faced in decades. Unfortunately, Europe may never recover from some of them.
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