Why is this Commodity Coming Under Pressure – Aluminium?

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Australian Economy, Macro Economics

Russian Rusal (the biggest aluminium producer other than China) has been seen to be the primary reason behind the recent plunging of Aluminum and this drove worries across the stock exchanges. US sanctions against Russian aluminum producer Rusal left buyers scrambling for alternative sources of the metal. As a result, aluminum climbed to the highest in about seven years. It also created problems for the London Metal Exchange. LME and CME Group, the world’s two largest metals exchanges, restricted new deliveries of aluminum from Rusal. However, the lately revised guidance from the US Treasury stated that Rusal’s non-US counterparties can wind up business with the company until October and can make payments to non-blocked bank accounts. This has given a sigh of relief to the likes of RIO Tinto. Further, US Treasury hinted to provide sanctions relief on a condition that billionaire Oleg Deripaska gives up the control of the Russian producer. This however, was not so good for the rising commodity price.

About one third of the aluminum in LME-registered warehouses around the world is now set to be released on to the market, according to data from the exchange. London metal exchange had specified about ceasing to accept aluminum produced by Rusal after April unless an indication of non-violation of the latest set of sanctions is issued. This spurred a rush to withdraw non-Russian metal from the LME’s warehouses. With non-Russian metal leaving the LME, many questions may erupt on the status of the LME’s aluminium contract as a benchmark for global prices. LME is a physical metals exchange, which means traders can settle transactions with delivery of aluminum to buyers. Not only did Rusal shares plummet in value, but the sanctions around the same have brought investors into uncharted area.

Some parts of the market financial plumbing were also squeezed given that investors and banks that buy and sell corporate debt rely on Deutsche Börse’s, Clear stream and Euroclear to settle the deals. However, suspension of automated processing of instructions for securities on the US Treasury blacklist, have also raised few concerns.

Not just this, alumina market was otherwise also facing issues as the world’s biggest refinery outside China, Norsk Hydro’s Alunorte refinery in Brazil was running at 50 per cent capacity post the tiff with state prosecutors.

As a result, many equities in the sector were seen to take some hit lately. Alumina Ltd (ASX: AWC) prices strengthened during 2017 as a result of High demand of alumina, tightness in the Atlantic market and structural & environmental reforms in China. Growth in demand for alumina rose by 7.7% in FY17. Recently, the company announced that Vanguard Group Inc. became the substantial holder in March 2018 by holding 144,092,710 of securities with 5.003 per cent of the voting power. However, with the recent turmoil, AWC stock, which has otherwise risen 45% in last one year, slipped by 2.2% in last five days (as at April 24, 2018).


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