The sanctions the United States government levied upon Oleg Deripaska and U.C. Rusal earlier this month have dominated the aluminium headlines, and rightly so. Though Washington, D.C. has since relaxed the sanctions, the slight reprieve is not a long-term answer to the issue, especially in the eyes of U.S. Treasury Department Secretary Steven Mnuchin. Market watchers almost immediately suggested that the best way forward for both parties was a nationalization of Rusal.
With the focus shifting from sanctions to nationalization, a new personality is likely waiting in the wings to enter the drama’s next act: Acting Minister of Trade and Industry of the Russian Federation Denis Valentinovich Manturov. Despite having a low international profile, Manturov has amassed an impressive record both in the defense and aviation sector and in the Russian government. Speculation is rife that Rusal’s likely nationalization may well figure into Manturov’s plans, making the addition of the company to Russia’s defense sector an attractive prospect.
While rumors emerged on April 26th that Deripaska wants to keep control of Rusal, it may actually be Manturov’s moves that will end up mattering more.
According to a CRU report seen by Aluminium Insider, two equally-likely scenarios are ahead for Rusal: a resolution of the sanctions is reached in the weeks ahead, or no breakthrough is made between Rusal and the U.S. government. Both assumptions assume nationalization, and both assume the company, in whatever form, will not go forward with Deripaska in the picture.
Under the first assumption, Rusal’s nationalization satisfies the Trump administration, allowing the state-run concern to ship aluminium smelted since the imposition of sanctions in large enough quantities to clear out stores and erase the need for the company to slow production. Though most of the aluminium smelted will never leave Russia’s borders in its raw state, bauxite and alumina supplies will remain robust enough to continue at nameplate production levels. Sales may be halted briefly, but transactions will likely recommence in most markets with a minimal delay. With Rusal back in the picture, CRU anticipates aluminium prices at LME to breach US$2,600 per metric ton in order to make exports from China more attractive, but prices will ultimately recede to US$2,250 per metric ton by year’s end.
Assuming no path forward is found, CRU predicts that Rusal’s output is reduced by necessity for the longer term thanks to both a drought of raw materials and a dearth of willing buyers. Bumping up against domestic demand and with no other ready outlets available, Rusal’s production is walled in, leaving prices to skyrocket and bringing China back into the primary aluminium export market. Rusal’s footprint shrinks to cover only Russia, Ukraine, and Guinea, and production falls to between 0.9 million and 1.4 million metric tons per annum. Rusal’s sales are limited to Russia, the CIS, and Turkey, and a quantity of SHFE warehouses. Meanwhile, prices for the metal hurtle to US$3,000 at the LME, drawing China from its aluminium shell and likely prompting a change in the country’s export tax. Such will define the “new equilibrium” according to CRU analysts.