U.S. actions against Russian source of key ingredient, alumina,
exact a harsh toll
By Scott Patterson and Sarah McFarlane
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (September 28, 2018).
The Trump administration's aluminum tariffs are aimed at
boosting U.S. producers' profits. But another move by the
administration -- sanctions against Russian aluminum giant United
Co. Rusal and its founder Oleg Deripaska -- is having the opposite
effect.
The sanctions have pushed up prices for aluminum's key
ingredient, alumina, eating into the profits of U.S. producers,
analysts and aluminum makers say. It takes about two tons of
alumina to make one ton of aluminum and companies that had
previously purchased the white powdery material from Rusal, which
makes 6% of the world's alumina, have been scrambling to get
supplies from other producers, squeezing limited supplies.
Production curbs at the world's largest alumina refinery in
Brazil and a strike by workers at aluminum giant Alcoa Corp. have
also put pressure on alumina prices. Through mid-September, alumina
prices had surged about 60% from a year ago to $625 a metric ton,
according to London commodities researcher CRU Research.
Alumina supplies "are really stretched globally, smelters are
scraping the bottom of the silos for stocks," said Ami Shivkar,
analyst at consultancy Wood Mackenzie.
While high alumina prices haven't translated into higher
aluminum prices yet, they are likely to do so by next year,
analysts say, pushing up the price of everything from beer cans to
cars. BMO Capital Markets forecasts London Metal Exchange aluminum
prices will average $2,182 a ton in the fourth quarter of 2018,
before rising to $2,314 a ton in 2019.
Century Aluminum Co., the biggest aluminum producer in the U.S.
ahead of Alcoa, said on an August earnings call that while the
administration's tariffs have boosted earnings, it expects higher
alumina prices to reduce adjusted third-quarter earnings by $35
million to $45 million.
The trouble for aluminum producers such as Century is that while
alumina prices have soared, the price for aluminum has remained
relatively stable. Through mid-September, aluminum traded on the
London Metal Exchange fell about 3% from a year ago to $2,050 a
ton, according to CRU.
The price of alumina as a percentage of aluminum prices this
month hit an all-time high of 31%, compared with 16% a year ago,
according to CRU.
New York brokerage Berenberg Capital Markets last week initiated
coverage of Century with a "sell" rating, citing high alumina
prices. "The drag from alumina is higher than the benefit from
tariffs at this point," said Berenberg analyst Paretosh Misra.
Century declined to comment.
Alumina prices dipped below $600 a ton after the Trump
administration eased some of its sanctions against Rusal last week
by allowing companies to enter new supply contracts with the
Russian producer, but remain historically high.
Alumina has become the biggest cost for aluminum producers,
eclipsing the cost of electricity used in production, analysts
say.
"Alumina is the tightest market right now of the commodities we
cover," said BMO analyst Kash Kamal.
Global output of alumina to make aluminum -- excluding China,
which typically consumes nearly all of its alumina -- is expected
to dip below 50 million tons this year, the lowest annual
production in a decade, according to BMO. A boost in supply next
year is expected to come from Emirates Global Aluminium's
two-million-ton alumina refinery, but for now supplies are tight,
analysts say. In 2018, China began exporting more alumina than it
normally does, taking advantage of higher prices, according to
CRU.
Aluminum plants are dependent on frequent deliveries of alumina,
only carrying a couple of weeks of supply at any one time.
Disruptions in the supply chain can quickly lead to higher prices.
Alumina is a product of refining bauxite mined by companies
including Rio Tinto PLC and Alcoa.
Aluminum producers that also sell alumina, such as Alcoa, aren't
as vulnerable to the spike in prices of the metal. Alcoa said in
July that the administration's tariffs are hurting its profits
because it relies on imports from Canada, a target of the
tariffs.
Problems in the market began with the world's largest alumina
refinery, Alunorte in Brazil. The refinery, which is owned by
Norway's Norsk Hydro ASA, has been operating at half its capacity
since March 1, when heavy rain triggered government concerns of
water contamination.
Then in April, the Trump administration sanctioned Rusal, one of
the world's biggest alumina producers. Rusal has until November to
implement governance changes required by the Treasury Department,
opening a path for its removal from the sanctions list. But
analysts say it is uncertain when the company's supply would be
coming back to market.
Rusal has said it is working to address problems created by the
sanctions and to protect the interests of shareholders.
A Norsk Hydro spokesman said the timing for resuming full
production at Alunorte remained up to the Brazilian environmental
authorities and a federal court, but noted the plant was "ready to
restart anytime."
Separately, Alcoa's three refineries in Western Australia --
which account for about 7% of global alumina supplies -- have been
hit by a strike that began on Aug. 8. An Alcoa spokesman said the
Australian Workers Union was meeting on Friday to discuss whether
to continue their strike.
Write to Scott Patterson at scott.patterson@wsj.com and Sarah
McFarlane at sarah.mcfarlane@wsj.com
(END) Dow Jones Newswires
September 28, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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