Sector in disarray as US freezes out Rusal
London — US sanctions on Rusal have thrown an estimated $3bn of aluminium into limbo.
Stockpiled metal produced by Rusal accounts for more than a third of the aluminium in warehouses monitored by the London Metal Exchange (LME). Though not explicitly subject to US restrictions, it is now a headache for the banks and traders who own it.
That likely includes Goldman Sachs, JPMorgan Chase, Glencore, Trafigura, Castleton Commodities International and Engelhart Commodities Trading Partners, among the top aluminium traders and inventory financiers. The companies declined to comment when contacted by Bloomberg.
"I don’t think there’s any doubt that it’s less valuable than other material," said Oliver Nugent, a commodities strategist at ING Bank.
"Consumers are concerned. Even taking old stuff that is pre-sanctions, they’re nervous."
The issue for the metals industry is how to navigate a grey area of US sanctions. There is no legal restriction on buying metal produced and sold by Rusal before the sanctions, say traders, bankers and lawyers. Even so, the products have become less desirable in the US and Europe.
The LME has banned Rusal metal produced after April 6, when the sanctions were announced, from being delivered to settle futures contracts. However, it said traders were "generally comfortable" dealing in metal produced and sold by Rusal before that date.
That has not been the case for all aluminium buyers. Some told their suppliers they will not accept delivery of any Rusal metal, regardless of when it was produced, say executives at trading firms and metal users, who asked not to be identified.
Banks are also navigating the issue. Most are willing to finance deals involving Rusal aluminium if the metal dates before the sanctions. But they are likely to scrutinise the product’s previous transactions to see if there is a risk of a violation. For example, banks may want to establish that Rusal or another sanctioned company did not receive financing for the metal at any point.
The uncertainties put a large part of the world’s stockpiles in limbo. Russian aluminium has made up a large proportion of global inventories since at least the early 1990s, when the collapse of the Soviet Union triggered a wave of exports. Aluminium from eastern Europe — likely produced by Rusal — accounted for 450,000 tonnes, or 36%, of global stockpiles tracked by the LME, according to exchange data on April 6.
Eoin Dinsmore, head of aluminium at CRU Group, estimated that a quarter, or just under 1-million tonnes, of global aluminium inventories outside China and outside the LME were likely to be Rusal-produced metal. Put those numbers together, and the total amount of Russian aluminium in warehouses from Rotterdam to New Orleans would be worth more than $3bn.
In practice, the most straightforward way for traders to deal with their stocks of old Rusal metal may be to deliver it to the LME. Already on Thursday the LME saw its second-largest aluminium delivery in four years. The bulk of the inflow came from Rotterdam and Vlissingen, two locations where traders historically held large volumes of Russian metal.
There could be more coming. Until Tuesday traders can deliver Rusal aluminium to the exchange as normal. After that they have to provide evidence it was produced before April 6 and does not breach sanctions.
"For stuff on the ground in the US, it’s hard to see another option. You’re not going to sell it," said Dinsmore of CRU. But outside the US, the Rusal metal will be in high demand.
"What’s sitting out there in the rest of the world isn’t completely untouchable, people will find buyers for it. It’s needed to alleviate some tightness," he said.