Sanction on Rusal to keep prices high in the short term; shares fall further in Hong Kong Exchange

As reported by Reuters shares of aluminium producer Rusal, owned by Russian billionaire Oleg Deripaska plunged as much as 41.8 per cent on Monday in Hong Kong Exchange after the U.S. administration announced sanctions on its co-founder Oleg Deripaska and seven other firms linked to him. They were the most prominent targets in a list of 12 Russian companies the U.S. hit with sanctions on Friday. U.S. sanctions generated uncertainties and doubt among the traders and investors on the future of the company’s banking and trading relationships. 

“The company’s initial assessment is that it is highly likely that the impact may be materially adverse to the business and prospects of the group,” the company said in a filing to the Hong Kong bourse on Monday. It said further evaluations were being carried out to assess the impact of the sanctions.

Prices of aluminium, jumped as traders protected themselves against the chance. The sanctions have created fear among aluminium traders that they might not be able to buy or trade metal from Rusal. Rusal sells the largest part of its aluminium to Glencore under a multi-year offtake contract that would expire this year.

“This does warrant a little bit of panic buying by traders -- the risk is large enough and real enough to buy on the back of insecurity of supply,” said Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd.

While the move will not cause a shortage, Shangha Metals Market senior analyst Liu Xiaolei believes it is likely to have an impact on the global aluminium supply landscape.

Three months London Metal Exchange aluminium rallied 2 per cent to $2,082.0 a tonne by Monday morning, adding to a 1.6 per cent gain on Friday and taking prices to the highest since March 22. Currently the contract is trading at around US$ 2134 per tonne. The rapid price rally generates a concern and indicates more volatility in the market. 

China’s industrial and manufacturing sector is active after the much discussed winter hibernation. So, with the reopening of smelters out will start growing again, unless domestic consumption is boosted in a large way. This would again put pressure on prices. The 10 per cent correction in aluminium prices in 2018 is a natural reaction to the metal’s 34 per cent growth in 2017. The growth was mostly on the expectation of about 4 million tonnes of capacity drop in China. Currently, the trade tension between the U.S. and China is creating uncertainty about Chinese aluminium export.

All put together, aluminium market is again moving towards volatility and it is expected to remain so for the first quarter of 2018.