MACRO ADVISORY: EU Aluminium Market and Aluminium from Russia
Source: bne IntelliNews
The EU is once more toying with the idea of slapping sanctions on one of Russia’s most important exports to Europe: aluminium. If it happens, the end of aluminium deliveries to Europe could cause prices to spike and drive smaller companies out of business as there are few alternatives to Russia’s aluminium.
Imports of primary aluminium from Russia into the EU have already slumped (chart) as business ties are wound down. Aluminium from Russia formed 18% of overall aluminium imports into the EU in 2021 but only 8-9% in 2023 (512,122 tonnes). Now the talk is of cutting off supplies completely.
The debate is heated as the sparing fractions try to count off the economic damage a ban could do to European manufacturers against the political goal of forcing Russia to end its war in Ukraine.
Sanctions will hurt aluminium consumers in the EU, either via price or supply chain effects, and it will not materially hurt the Russian energy sector or the budget, according to Macro Advisory in a new extensive report made exclusively available to bne IntelliNews.
Russia can find buyers elsewhere – China for one will be happy to increase its imports of cheap Russian aluminium. Russian exports to the EU in 2023 were about 0.5mn tonnes. The Chinese aluminium market has a deficit of about 1mn tonnes, according to a leading company. Russian aluminium is attractive to Chinese buyers because it is low carbon, which reduces the carbon content of Chinese products, such as autos which are seeking to increase market share in the EU.
The EU, on the other hand, has few other places to go to buy aluminium and is in competition with the US that has also choked off Russian supplies. Both are looking at the Middle East as an alternative supplier. EU imports of aluminium from the Middle East in 2023 were nearly 1.2mn tonnes or 18.8% of total EU aluminium imports, while the US imported more than 800,000 tonnes or 19.3% of imports. But the Middle East can’t match Russia for volumes and reportedly what aluminium supplies there are, are already contractually committed.
Without Russia, the carbon content of EU aluminium imports will rise dramatically, impacting the EU’s climate change ambitions to limit carbon as part of the EU’s Green Deal and the impending Carbon Border Adjustment Mechanism (CBAM). The ban would be self-defeating, says Macro Advisory: on the one hand, the EU is penalising high carbon content with CBAM, while, on the other hand, considering a ban on its main source of low-carbon products.
“The EU has few low-carbon alternatives to Russia,” says Macro Advisory. “Banning Russian aluminium would increase the annual carbon content of Europe’s imported aluminium by 3%, i.e. if the supply can be replaced by the cleanest sources. However, most of these sources are already at capacity. If the supply is replaced at the global average carbon content, then this would boost the CO₂ content by about 14%.”
The idea could become part of the fifteenth package of sanctions and was proposed by a minority of EU members, including Lithuania, Estonia, Latvia, and Poland, which consume relatively low volumes of aluminium, according to Macro Advisory, although the objections from countries that use a lot more Russian Aluminium, such as Italy and Greece, has remained muted for now.
This is not the first time that sanctioning aluminium has been proposed. Previously, the EU considered adding aluminium sanctions to the twelfth sanctions package and the thirteenth sanctions package by shying away in the end due to protestations by European industry. The Federation of Aluminium Consumers in Europe (FACE) warned that a ban would be devastating for Europe’s SMEs at a time when Europe is already less competitive thanks to higher energy costs across the board, caused by the sanctions boomerang effect.
Conversely, while aluminium is a value export, its share of overall exports is only 1.5% by value and will have little impact on the Russian budget, making any ban a token gesture.
“Rusal, Russia’s sole aluminium exporter, paid $125mn in tax in 2023. This was, at most, 0.022% of the Russian government’s revenues. The company uses about 5.8% of Russia’s total electricity, and 31% of its hydro power – but it will use this power to produce the aluminium that it would have exported to Europe and will instead export it to other markets,” says Macro Advisory.
Europe has been trying to cut all business ties with Russia through sanctions and more generally with self-sanctions imposed by Western companies breaking off ties with Russia on a voluntary basis. But belatedly Europe has become aware of just how deeply integrated they are with Russia’s production, well beyond simply relying on cheap Russian gas imports.
“If there is a recovery in EU demand for aluminium, which has been depressed by high energy prices due to the Ukraine conflict, then European producers will be hard-pressed to supply the deficit. Alternative sources of supply such as Mozambique and the Gulf are constrained,” says Macro Advisory.
There have already been two painful price spikes when the US and UK sanctions were imposed on Aluminium in April 2024, even though Russian exports to the US were near zero due to 200% tariffs, and the UK had already banned Russian aluminium. Prior to that there was another spike in prices in 2018 when a comprehensive set of sanctions was imposed on Rusal’s owner Oleg Deripaska and a ban on doing business with all these companies. The Office of Foreign Assets Control (OFAC) quickly backed off after the price of aluminium soared over 40% in a day and were eventually withdrawn – the only sanctions on Russia to have been lifted so far. Macro Advisory warns that prices will rise “significantly” again if the new sanctions are put in place.
The original article: bne IntelliNews .
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