Aluminium jumps to record as Russia’s attack on Ukraine raises supply risks

Some large trading houses have recently loaded aluminum from Malaysia's Port Klang in break-bulk vessels destined for Europe. PHOTO: REUTERS

LONDON (BLOOMBERG) - Aluminium rallied to a record in London on Thursday (Feb 24), exceeding its 2008 peak, as the deepening Ukraine crisis added to supply risks in a market already seeing critical shortages of the most widely-used base metal.

Aluminium is used in all kinds of everyday items, from beer cans to iPhones and cars, so the impact is widely felt.

US President Joe Biden warned that Russia faces “severe sanctions” after his counterpart Vladimir Putin ordered a military attack on Ukraine. That raises the possibility of measures that could affect Russian supplies of aluminium as well as other commodities from oil to nickel.

Russia’s aluminium exports equate to about 4 per cent of global production. It is also an important producer of nickel, palladium and copper.

“The market will be monitoring whether this will disrupt Russia’s shipments of aluminium ingot to Europe,” said Zhong Mingzheng, an analyst with Jinrui Futures.

Any disruptions to Russia’s natural gas exports might also hamper aluminium production by raising energy costs at European smelters, she said.

The metal rose as much as 2.9 per cent to US$3,388 a tonne on the London Metal Exchange, extending its blistering rally

The aluminium market has some fairly recent experience of handling big disruptions to flows of Russian aluminium. US sanctions on major producer United Co Rusal International PJSC in 2018 sent prices soaring about 30 per cent and sparked a frenzied hunt for alternative metal. The penalties were lifted after billionaire Oleg Deripaska agreed to reduce his ownership and relinquish control.

To be sure, there is no guarantee that the situation in Ukraine, or any planned sanctions by the US or Europe, will affect aluminium or any other metal. 

Aluminium has seen a dramatic turnaround over the past two years, after being hit particularly hard early in the pandemic as lockdowns sparked a collapse in usage in the automotive and aerospace sectors. The metal has since more than doubled as high energy prices sparked widespread smelter shutdowns in China and Europe, just as demand in areas including construction and packaging started roaring back.

Raw materials from nickel to crude oil have surged in recent months as consumption has risen sharply with the world emerging from the pandemic, while supply has lagged.

ith aluminium inventories now reaching critically low levels, the metal’s soaring price is adding to cost pressures on manufacturers, and analysts see further gains.

Goldman Sachs  predicted prices will reach US$4,000 within 12 months amid “unprecedented” supply tightness.

With the backwardation rising, traders who are waiting to withdraw metal from LME warehouses in the port may instead decide to deliver it back in, the traders said.

Beyond the short-term relief that the stash in Port Klang might provide, the broader question for consumers and traders is how the deepening shortages will be solved over the longer term.

Traders and banks including Trafigura Group and Goldman Sachs Group have warned that further price spikes may be needed to incentivise new supply. But with surging raw material prices piling pressure on manufacturers, it is also possible the global shortages will end up being alleviated by a slump in demand - creating risks for investors and physical traders alike.

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