CRU: Russian Aluminum's Looming Logistical Challenges

This attention is warranted given the importance of Russian primary aluminum in global trade.

As discussed in prior columns, Russia is a key part of the market, representing the largest net exporter of primary metal (3-3.2 million metric tons per year) and a supplier of 40% (1.5 million tons) to Western Europe.

LME prices and regional physical premiums have been edging higher with each passing week as fears have grown about the imposition of sanctions.

At this writing, explicit bans on Russian metal have not been imposed. But we continue to hear of individual corporate decisions to suspend new commercial dealings with Russia. Companies with existing contracts continue to perform on them. The logic: until government restrictions are imposed, allowing these contracts to go to term is the most sensible way to “wind down” commercial interaction.

While this has been playing out, we are seeing a parallel development that could have an equally significant impact on the aluminum supply situation. That is the growing problem of alumina supply into Russian primary aluminum smelters.

UC Rusal’s Alumina Supply Is Now Vulnerable

The first inkling that alumina could become the pinch point in Russian aluminum supply was when the Nikolaev refinery in Ukraine was shut down because of the war. This refinery is wholly owned by UC Rusal and shipped its entire 1.7 million tons/year production back to feed the Rusal smelting system in Russia. That is the equivalent of about 850,000 tons of aluminum production.

Rusal’s alumina supply situation has been further complicated by the Australian government’s refusal to allow alumina cargoes from Queensland Alumina Limited (QAL) to be shipped to Russia. Rusal owns 20% of this 3.9 million ton/year refinery, entitling it to about 800,000 tons of alumina from its direct equity stake. In addition, Rusal was able to purchase or swap for another 400,000 tons. Notably, it exchanged production from its Aughinish, Ireland, refinery for tonnage in the Pacific basin that was better suited logistically to be imported to its Siberian smelters.

The loss of this additional 1.2 million tons of alumina supply also puts another 600,000 tons of aluminum production in jeopardy.

Conventional wisdom has suggested that Rusal would compensate for the loss of these 2.9 million tons of alumina by slowing down the ramp-up of its new, greenfield smelter at Taishet. But the math doesn’t add up. Taishet is a 345,000 tons/year smelter coming up in 2022. Rusal is losing the equivalent of about 1.55 million tons of aluminum production. There is a gap of over 1.2 million tons of alumina required. Without a solution, Russia might have to curtail aluminum production. This would in practice have the same effect as export sanctions on 1.2 million tons of metal, or nearly what the EU is buying. That’s problematic for the market.

This is where China comes into play.

China To the Rescue?

Over the past five years, China has built substantial alumina refining capacity in its coastal regions along with interior locales in Guizhou and Guangxi. On paper, China is now self-sufficient in alumina production. It also has a very robust supply chain for bauxite, the feedstock for making alumina. China now dominates exports from Guinea, allowing it to ramp up domestic alumina production to some degree.

China has exported alumina in the past several years when global prices raced ahead of domestic prices. It is now conceivable and likely that 2022 will produce a similar arbitrage opportunity, driven by Russian requirements to replace the loss of Ukrainian and Australian alumina.

CRU understands that Chinese cargoes are already on the way to Russian Pacific ports, perhaps 60,000 tons to test the logistical capabilities of this route.

China will obviously have no reservations about supplying Russia with alumina in defiance of any sanctions by the US or NATO countries.

This supply could take several forms:

• The Chinese could exchange alumina for aluminum in a barter transaction. Russia needs the alumina, and the Chinese were importing aluminum, so it is a convenient swap.
• China could toll the alumina with Rusal and take back the alumina at an attractive conversion fee.
• Russia could simply purchase the alumina outright and pay in roubles. (We believe this is the least likely scenario.)

Does the China Alumina Connection Forestall Russian Production Curtailments?

China has production capacity on paper to fill Russia’s alumina gap. The open question now is whether they can gear up logistically to make this happen. A seamless transition from Ukrainian and Australian supply would mean monthly imports of 240,000 tons. That’s four times the amount of alumina that is currently “on the water” to Russia from China.

It also represents exports rivaling the total of China’s IMPORTS in recent years. China always seems to rise to the occasion of overcoming seemingly major logistical challenges (bauxite and metal imports in recent years). It would be dangerous to assume that China can’t master this pivot toward Russia. But the market is going to take a wait and see approach to determine whether there are signs that Russia will rationalize some metal production.

If there is any rationalization, it likely comes at the expense of Russia’s smaller smelters in its “West” – such as Kandalasksha, Novokutznetsk or Volgograd.  These three smelters have a combined output of about 350,000 tons. The larger smelters in Siberia – such as Bratsk, Krasnoyarsk and others – would be protected at all costs.

Stay tuned for more developments on the China-Russia alumina trade. They will be pivotal to the great aluminum supply crunch of 2022.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

CRU also covers the alumina market comprehensively. Please contact Lais Santos (lais. santos @crugroup.com) or Anthony Everiss (anthony. Everiss @crugroup.com) to explore CRU’s alumina coverage.

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