Relief for Rusal, but aluminium’s political risks remain

This is good news for the Russian company, which has been shunned by buyers negotiating 2019 shipments.

It’s also good news for the aluminium market, which was facing the prospect of 3.7 million tonnes of Rusal product being locked out of the supply chain.

However, the broader sanctions threat against Rusal, a by-product of the sanctions against its oligarch owner Oleg Deripaska, remains.

An Oct. 23 deadline for customers to wind down business with the company still stands, leaving any new contracts still beholden to the same underlying uncertainty about when sanctions will be fully lifted.

And even if sanctions are eventually removed, political risk is not going to disappear any time soon from the aluminium market.

Relations between the United States and Russia, the world’s second largest producer of the metal, remain strained, to say the least.

Relations between the United States and China, the world’s largest producer, are deteriorating by the day as the drums of trade war beat ever louder.

Loosening the screws

The Office of Foreign Assets Control (OFAC), which administers U.S. sanctions, announced on Friday the changes in the form of an amended list of “Frequently Asked Questions”.

The “maintenance” of existing contracts has been extended to include “transactions and activities… in a manner consistent with past practices that existed between the party” and Rusal prior to the imposition of sanctions on April 6.

Existing contracts were already allowed to run up until the Oct. 23 sanctions deadline.

Now, new contracts will be allowed beyond that date if they are consistent with past practice, based on a demonstrable transaction history.

Even stockpiling Rusal metal may be allowed, if the “transaction history indicates that the scope and extent of maintaining inventory is consistent with past practice.”

The concession comes just as global aluminium producers and consumers are negotiating long-term contracts covering 2019 shipments.

The annual “mating season” has been taking place at Metal Bulletin’s aluminium conference in Berlin, but Rusal faced being locked out of the talks as buyers balked at the risk of falling prey to secondary sanctions.

The question now is whether OFAC has offered enough to change those buyers’ minds.

The catch with any new contracts is that they will remain “contingent on such performance either not being prohibited or being authorized by OFAC.”

That sanctions clock, in other words, is still ticking.

Sanctions clock ticking

Swiss trade house Glencore, which markets a significant amount of Rusal metal to the rest of the world, is likely to have the risk appetite to capitalise on exactly this sort of shift in the U.S. stance.

But others such as the automotive companies that buy Rusal’s aluminium alloy products may be considerably more wary until the sanctions threat is fully dispelled.

This is widely assumed to be a case of “when” not “if” in the aluminium market.

The London Metal Exchange (LME) three-month aluminium price is currently trading around $2,020 per tonne, pretty much where it was before the April 6 sanctions sent it rocketing to a high of $2,718.

OFAC’s latest move will reinforce the market’s conviction that sanctions will be lifted once Deripaska steps back from Rusal.

Why hold out the prospect of new contracts if they are only going to be snatched away again in a few weeks’ time?

But on the flip side, why haven’t the sanctions already been lifted in full, given the U.S. administration’s soothing noises about not wanting to inflict excessive collateral damage on Rusal and signs that Deripaska is prepared to reduce his influence in the company?

It feels as if OFAC has given Rusal some breathing space but is not yet ready to release fully the sanctions pressure, implying a second extension of that deadline.

That’s probably not going to be enough for risk-averse customers to commit to 2019 contracts, meaning there will be a significant amount of aluminium, particularly in alloy form, without an obvious home next year.

Bigger political picture

In less troubled times the sanctions on Rusal would already have been removed after a deal on just how far Deripaska would have to step away from the company.

U.S. Treasury Secretary Steven Mnuchin said back in July that “we weren’t looking to put sanctions on aluminium companies.”

Rather, “the intent was to change the behaviour of the oligarch.”

But the absence of any peace deal suggests that Rusal has been caught up in the bigger political stand-off between Russia and the United States.

The list of flash-points extends from the annexation of the Crimea through interference in U.S. elections to the alleged poisoning of a former Russian agent and his daughter in Britain.

Rusal may be looking for sanctions relief but U.S. lawmakers are calling for more and tougher sanctions against Russia.

The political risk of doing business with Russia is still rising and with it the political risk of dealing with Rusal, even without sanctions.

Political risk of a different kind is also rising in terms of U.S. relations with China.

Chinese dominance of the global supply chain has already seen the U.S. administration respond with aluminium import tariffs, a scattergun approach that has riled both friends and foes.

China’s response was to include imports of U.S. aluminium scrap in the first round of broader tit-for-tat tariffs.

A new round of U.S. tariffs, upping the stakes to $200 billion of Chinese goods, is widely expected as soon as later on Monday.

Beijing has already made it clear it will respond in kind with a “beautiful counter-attack” to quote The Global Times, which is published by the ruling Communist Party’s People’s Daily.

Aluminium trade between the two countries was already politicised before Donald Trump became U.S. president. It is now one of the key flash-points in the bigger trade dispute.

The Rusal sanctions may be lifted.

Eventually.

But political risk in the aluminium market is here to stay.

(By Andy Home; Editing by Susan Fenton)