Aluminum Makers Feel Sanctions

U.S. actions against Russian source of key ingredient, alumina, exact a harsh toll


A Rusal refinery's limestone mine in Siberia. The company says it is working to address sanctions.

The Trump administration's aluminum tariffs are aimed at boosting U.S. producers' profits. But another move by the administration — sanctions against Russian aluminum giant United Co. Rusal and its founder Oleg Deripaska — is having the opposite effect.
 The sanctions have pushed up prices for aluminum's key ingredient, alumina, eating into the profits of U.S. producers, analysts and aluminum makers say. It takes about two tons of alumina to make one ton of aluminum, and companies that had purchased the white powdery material from Rusal, which makes 6% of the world's alumina, have scrambled for supplies from other producers.
 Production curbs at the world's largest alumina refinery in Brazil and a strike by workers at alumina refineries owned by Alcoa Corp. have also pressured alumina prices. Through mid-September, alumina prices had surged about 60% from a year ago to $625 a metric ton, according to London commodities researcher CRU Research.
 While high alumina prices haven't translated into higher aluminum prices yet, they are likely to do so by next year, analysts say, pushing up the price of everything from beer cans to cars. BMO Capital Markets forecasts London Metal Exchange aluminum prices will average $2,182 a ton in the fourth quarter of 2018, before rising to $2,314 a ton in 2019.
 Century Aluminum Co., the biggest aluminum producer in the U.S. ahead of Alcoa, said on an August earnings call that while the administration's tariffs have boosted earnings, it expects higher alumina prices to reduce adjusted third-quarter earnings by $35 million to $45 million.
 The trouble for aluminum producers such as Century is that while alumina prices have soared, the price for aluminum has remained relatively stable. Through mid-September, aluminum traded on the London Metal Exchange fell about 3% from a year ago to $2,050 a ton, according to CRU.
 The price of alumina as a percentage of aluminum prices this month hit an all-time high of 31%, compared with 16% a year ago, according to CRU. New York brokerage Berenberg Capital Markets last week initiated coverage of Century with a “sell” rating, citing high alumina prices. “The drag from alumina is higher than the benefit from tariffs at this point,” said Berenberg analyst Paretosh Misra.
 Century declined to comment. Alumina prices dipped below $600 a ton after the Trump administration eased some of its sanctions against Rusal last week by allowing companies to enter new supply contracts with the Russian producer, but remain historically high. Alumina has become the biggest cost for aluminum producers, eclipsing the cost of electricity used in production, analysts say.
 Global output of alumina to make aluminum — excluding China, which typically consumes nearly all of its alumina — is expected to fall below 50 million tons this year, the lowest annual production in a decade, according to BMO. A boost in supply next year is expected to come from Emirates Global Aluminium's two-million-ton alumina refinery, but for now supplies are tight, analysts say.
 Aluminum plants are dependent on frequent deliveries of alumina, carrying only a couple of weeks of supply at any one time. Disruptions in the supply chain can quickly lead to higher prices. Alumina is a product of refining bauxite mined by companies including Rio Tinto PLC and Alcoa.
 Aluminum producers that also sell alumina, such as Alcoa, aren't as vulnerable to the rise in prices of the metal. Alcoa said in July that the administration's tariffs are hurting its profits because it relies on imports from Canada, a target of the tariffs.
 Problems in the market began with the world's largest alumina refinery, Alunorte in Brazil. The refinery, which is owned by Norway's Norsk Hydro ASA, has been operating at half its capacity since March 1, when heavy rain triggered government concerns of water contamination.
 Then in April, the Trump administration sanctioned Rusal, one of the world's biggest alumina producers. Rusal has until November to implement governance changes required by the Treasury Department, opening a path for its removal from the sanctions list. But analysts say it is uncertain when the company's supply would be coming back to market.
 Rusal has said it is working to address problems created by the sanctions and to protect the interests of shareholders. A Norsk spokesman said the timing for resuming full production at Alunorte remained up to the Brazilian environmental authorities and a federal court, but noted the plant was “ready to restart anytime.”

Metal Mania
Alumina prices have jumped as much as 60% in the past year. Aluminum has fallen about 3% in that time.


Change in prices since the start of 2008, monthly
Note: Through Sept. 27
Source: CRU Group

 

BY SCOTT PATTERSON AND SARAH MCFARLANE

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