Why Treasury is right to lift sanctions on Rusal

Last week U.S. Treasury Secretary Steven Mnuchin said that he was open to lifting sanctions on United Company Rusal, one of the highest-profile victims of Donald Trump’s crackdown on Russia. While Mnuchin insists he is merely trying to keep the world’s second-biggest aluminium producer afloat, the move is more likely an acknowledgement of market realities: Rusal is too big and too integrated in global supply chains to be replaced.

When the sanctions were announced in April, the U.S. Treasury said they were designed to punish Oleg Deripaska, Russian billionaire and owner of Rusal, rather than the company itself. Since, Deripaska has taken steps to get Rusal delisted by stepping down from its board and divesting from his other business interests.

As soon as the Rusal sanctions were announced back in April – on grounds that Deripaska was somehow responsible for spreading Russia’s "malignant activities" – analysts recoiled in horror. Taking off the global market with a moment’s notice a company that produces 7% of the world’s aluminium was one of the most dramatic and ham-fisted events in the history of the industry, eclipsing the Trump administration’s previous decision to slap tariffs of metal imports on national security grounds.

Indeed, just weeks before the Rusal sanctions, the U.S. Treasury rolled out a 10% aluminium tariff under Section 232 of the U.S. trade laws. Trump, whose administration hopes to double U.S. aluminium production as part of its aggressive protectionist strategy, described imports of the metal as “an assault on our country”. Yet the U.S. President seemed not to realize that high electricity costs and an absence of raw materials harmed the competitiveness of the country’s aluminium industry – and not imports.

The sanctions predictably sent shockwaves all the way along the global aluminium supply chain. In addition to its aluminium production, Rusal churns out millions of tonnes of aluminium oxide, or alumina – the raw material used to smelt the metal – every year. Its fleet of plants, stretching from Jamaica to Ukraine, underpin the global production line and its traders exchange millions of tons of alumina every year through a network of partners. Now, with the Rusal sanctions crippling global supply chains, industry experts are sounding alarm bells about alumina supply shortages – and subsequently higher prices for the material.

Rio Tinto, which prior to the sanctions sold bauxite to Rusal’s huge plant on the Irish peninsula of Aughinish and bought the alumina refined from it, declared force majeure on a number of contracts, notably at Aughinish, fearing secondary sanctions. This suddenly threatened the closure of the Aughinish facility, leaving Rio scrambling to supply alumina to its smelters in France and Iceland, a problem shared by rivals such as Trimet and Liberty House.

Global alumina supplies are already running low, and in another jolt of bad news for the industry, this problem is only set to get worse in the nearer future. When the sanctions against Rusal were announced, the alumina market was already railing from the supply shock caused by the partial closure of Norsk Hydro’s Alunorte alumina plant in Brazil. The world’s largest alumina plant with an annual capacity of 6.3 million tonnes, was ordered to cut its output by 50% in February this year due to environmental concerns. Hydro warned that the plant could only return to full capacity as late as mid-2019. Hydro’s quarrels together with the sanctions led to panic-buying of alumina that caused the raw material’s price to surge to more than $500 per tonne.

Even if the price has slightly recovered, the outlook does not look good. China has been closing alumina plants since last year and will continue to do so in order to achieve environmental targets under its “blue sky” policy. As such, the alumina deficit is only set to grow, creating a perfect storm for the aluminium industry at an extraordinarily testing time, because without alumina, there is no aluminium.

In fact, the impact is already being felt. European downstream SMEs lamented that replacing Russian metal forced them to accept higher input costs of around 20%, heralding bad times for an industry accounting for some 250,000 jobs. Companies such as BMW and Boeing are equally facing aluminium supply shortages as the tremors spread to several other industries, such as packaging.

Long-term damage

This turbulence brutally exposed the flaws in the aluminium supply chain and damaged the aluminium market’s reputation for stability days as panic-buying replaced the usual prudence.

After realizing the damage caused by the sanctions, the Treasury relaxed the listing shortly after unveiling, giving Rusal an extra six months to wind down its U.S. operations. Yet, even though Mnuchin now appears ready to lift the sanctions completely, the damage is clearly already done.

Furthermore, while the aluminum market has cooled significantly, metals consultancy CRU believes the price could rise above $3,000 if the sanctions on Rusal are not lifted. Far from encouraging U.S. production, this might play into the hands of China, Trump’s fiercest trade rival. Although alumina production has been curbed, China’s excess aluminium capacity remains high. Its exports are forecast to hit an all-time high this year, as the country rushes to fill the Rusal gap and high commodity prices neutralize the effect of Washington’s tariff. If CRU’s forecasts came true, it would make Chinese aluminium exports seriously competitive – which presumably wasn’t what Trump and his Treasury team had in mind.

Just three months after the Russia sanctions were imposed, there’s no doubt Mnuchin is right to remove them. The damage is glaringly apparent across the global economy, from SMEs squeezed by soaring aluminium prices to global producers whose supply lines suddenly appear extremely brittle. Yet, no matter what the Treasury does, the long-term message is clear: no matter how big your company, no matter how significant it is to the global supply chain, you could be next should the White House deem it so.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.