Wherefore Art Thou Russian Aluminum?
Changing Supply Chain | Russia China India Dynamics | Emerging Middle East
Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week's BWR, I discussed Russia’s bumper grain harvest and the Kremlin’s attempt to weaponize another commodity—grains—at the expense of Ukraine and the global south.
In this week’s BWR, I will discuss Russian aluminum exports and the impact of tightening sanctions against Russian aluminum is having on the supply chain and markets.
This week’s piece is part of an ongoing series of Russian commodities, from natural gas to nonferrous metals, that I have covered and will continue to cover.
Takeaways:
GLOBAL MARKETS: Russia is the third-biggest global producer of aluminum after China and India. Middle Eastern countries, particularly the United Arab Emirates and Bahrain, are emerging players in the global aluminum market as Russia withdraws from Western markets. Western sanctions are changing the supply chain landscape from raw material to finished product.
ALUMINUM FEEDSTOCK: China and India have become more important to the supply chain for Russian aluminum manufacturing. Since Putin’s war on Ukraine, Russia’s traditional alumina sources—Ukraine itself and Australia—have been cut off. Russia’s aluminum export markets have also changed due to sanctions and self-sanctioned policies enacted by traditional buyers.
DEPENDENCE: Putin’s war has yet again forced Russia to become more dependent on China, this time both for feedstock imports and increasingly as an export market for Russian-finished aluminum. Albeit the China/Russia aluminum trade relationship is mutually beneficial, it is nevertheless driven by China as the the senior partner.
CHANGING MARKETS
As part of the West’s continuing effort to disrupt and reduce the Kremlin’s revenues from its commodities exports, on 12 April the United States (in coordination with the United Kingdom) issued two new prohibitions on Russian aluminum, copper, and nickel exports. The sanctions package covers 5.6%, 4.0%, and 6.0% of the global supplies of these three metals, and as a result of the actions, the London Metal Exchange (LME) and Chicago Mercantile Exchange (CME) will be prohibited from accepting new aluminum, copper, and nickel produced by Russia after 13 April 2024. The date is important, though: 90% of the aluminum in the LME warehouses is of Russian origin, but because of its manufacturing date — before 13 April — it is not subject to the new sanctions.
RUSSIAN AND OTHER ALUMINUM MARKETS
The aluminum manufacturing process is energy-intensive, from the mining of bauxite to the manufacture of the semi-finished alumina material to the finished aluminum product for aerospace, batteries, and auto production. The illustration below depicts a simplified manufacturing process.
Today, Russia is the third-largest aluminum producer in the world, manufacturing 4.1 million metric tonnes (MMT) annually, or about 5.6% of the global total supply. It exports 3MMT of its production. RUSAL, Russia's largest aluminum smelter, ships 38% of its product to Asia, 32% to CIS countries, and 28% to Europe.
China is the largest aluminum producer in the world, and the sector’s production capacity is capped by law. As part of the Chinese national program to eliminate overcapacity in energy-intensive and polluting industries, China set a production capacity cap of 45MMT on annual aluminum production. This law was implemented in 2017, and China is close to breaching this artificial production capacity. Adding to the capacity stress are low rainfall climate conditions in Yunnan province, a hydro-energy-rich region with a concentration of smelters. This has forced the government to limit the energy consumption of local smelters, as a result impacting production.
In 2021, China imported just 291,000 MT of aluminum from Russia. Yet in 2023, it imported 1.6MMT of aluminum, of which 70% came from Russia. China’s import of Russian aluminum is expected to increase in 2024. The increased Chinese demand is driven by the cap on Chinese production capacity, favorable discount pricing on Russian aluminum due to Western sanctions and tariffs, and the ability to settle in Renminbi.
As the chart below illustrates, beginning in 2022, China ramped up exports of alumina, the semi-raw material needed to produce aluminum, with nearly 88% of all exports (1.2MMT) going to Russia in 2023. Again, this contrasts with almost zero before 2021.
Russia has also stepped up its alumina imports from India, though Indian alumina already accounted for a major portion of Russia’s 2021’s imports. Russia uses the alumina feedstock to operate its Siberian facilities. According to reports, these imports help reduce the country’s reliance on China, but this is a short-term solution for Russia. Russian dependence on China is growing in the commodities sector and aluminum is not immune to this dependency trend.
Why the sudden increase in alumina imports? After Russia invaded Ukraine, it lost access to multiple sources of alumina. The first was in Ukraine itself. The other major source was Australia, which banned the supply of this critical raw material to Russia. Also, Chinese producers are reaching their legal production capacity, and the demand for aluminum continues to grow, largely driven by the Chinese EV sector.
Middle Eastern countries and India are positioned to capture export market share as they continue to add manufacturing capacity and streamline their supply chains.
According to the International Aluminum Institute, Middle Eastern producers were responsible for 6.2MMT, or nearly 9% of global supplies, in 2023. Their exports are expected to increase over the next five years as demand increases. Approximately 2MMT of 6.2MMT was shipped to Europe and the United States. The United Arab Emirates (UAE) represented 8% of all US aluminum imports. Emirates Global Aluminum is the country’s largest aluminum producer.
In 2023, India replaced Russia as the second-largest aluminum producer in the world with 4 MMT, of which 56%, or 2.3 MMT, was exported. India is among the lowest-cost aluminum producers due to its integrated supply chain and low energy costs. Indian smelters use captive coal-based plants to power their facilities. The EU is India’s second-largest trading partner and a significant aluminum export market.
Conclusions:
Growing Western sanctions on Russia, an important global source of critical commodities, are creating economic opportunities across the supply chain. Western sanctions, coupled with climate change issues affecting Chinese aluminum production and the Chinese government’s legal cap of 45MMT/annual, are two important drivers helping to forge a mutually beneficial Russian-Chinese aluminum trade relationship. China needs the raw materials for its growing electric vehicle and battery sector, and Russia needs new markets as it withdraws from Western markets.
As Russia continues to withdraw from Western markets by force or the self-sanctioned policy of buyers, India and Middle Eastern countries such as the UAE are acquiring market share at Russia’s expense. India and UAE are building capacity and securing supply chains and end-users. Meanwhile, Russia is becoming more dependent on China, both for imported aluminum feedstock (alumina) and as an export market for primary aluminum.
Follow-ups & Quick Bites:
Follow-ups:
Indian Government Approves Russian Reinsurer as Maritime Insurance Underwriter
The Russian National Reinsurance Company (RNRC), a Russian state-owned reinsurer controlled by the Central Bank of Russia, has given financial backing to three Russian insurance firms, allowing them to receive approval from the Indian Directorate General of Shipping to provide marine insurance coverage to Russian and foreign-flagged crude oil tankers. Russian insurance companies Sogaz Insurance, Alfastrakhovanie, and VSK Insurance are now approved maritime shipping insurers.
The Europe-based International Group of P&I Clubs, which comprises twelve P&I clubs, underwrites approximately 90% of the world's ocean-going shipping tonnage. The RNRC is not part of the IG.
In the BWR October 2023 issue, Russian Oil Price Cap & New Ecosystem, I discussed the changing maritime insurance landscape as Russia decouples from Western financial support services and develops its own global network of support services. Russian shipping now has a formalized partner.
Quick Bites
Norilsk Nickel (Nornickel) to Build New Copper Plant in China
In a strategic move driven by Western sanctions and China’s growing importance to the Russian economy, Nornickel plans to close its Arctic copper plant and establish a new joint-venture facility in China by 2027. The new facility is expected to receive approximately 2 MMT tons of copper concentrate annually.
This strategic shift aligns with China’s significance as an increasingly important market for Russian commodities, particularly in the face of escalating sanctions and China’s position as the world’s biggest producer of EV batteries.
In an interview with Interfax, Nornickel President Vladimir Potanin said:
"The project will enable us to avoid big losses due to current difficulties with settlements, supply refusals, discounts on our metal and the formation of inventories,"
While Nornickel and its products are not subject to Western sanctions, the company still faces voluntary refusals to buy Russian products in Europe, an export market that represents 30% of its revenue.
Russian court orders seizure of JPMorgan Chase funds in VTB
A Russian court has ordered the seizure of JPMorgan Chase bank accounts in Russia in a lawsuit filed by state-owned bank VTB as it seeks to regain funds blocked abroad.
JP Morgan Chase last week sued VTB in New York to stop it from recovering $439M from an account that was blocked after Russia’s second invasion in 2022. JP Morgan Chase said U.S. law prohibits it from releasing the $439M and VTB will try to seize its assets abroad if it prevails in the Russia lawsuit.
Ukraine Strikes Another Russian Black Sea Warship
Ukraine claimed responsibility for last week’s Neptune missile strike on the Russian warship Kommuna while it was docked in Russian-occupied Sevastopol. The extent of the damage is not known, but video of the fire was captured and circulated on social media.
The Kommuna is the the Black Sea Fleet’s longest-serving warship. It was christened for naval Tsarist Imperial service in 1915. It has served the Soviet Black Sea Fleet and was used by the Russian navy for deep-sea work, including raising submarines and sunken cargo.
Vol 2, No 20 - BWR 28.04.2024
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.