Nornickel: Sanctions increase risk of metal market disruptions, price increases

MOSCOW. April 16 (Interfax) - U.S. and UK sanctions against Russian base metals will have an adverse impact consumers around the world, Russian mining and smelting giant Norilsk Nickel said in a statement.

And "despite the difficulties and challenges of recent years, the company is still a reliable supplier and will honor all existing contractual obligations with customers."

"Nornickel regrets the decision that has been made, because it will worsen price volatility, increase supply chain uncertainty and trigger increases for end prices, which will adversely affect consumers of these metals worldwide. In addition, the risk of market disruption will heighten as metals liquidity decreases and the cost of financing vital industrial supply chains increases," the company said.

Nornickel said the restrictions do not apply to products containing these metals which are part of a new product or are modified significantly outside Russia.

The United States and the United Kingdom banned their citizens and residents from participating in global exchange transactions with Russian nickel, copper and aluminum on April 12, 2024. As a result, metals produced in Russia after April 13 will effectively not be tradeable on the London and Chicago Metal Exchanges. In addition, the US has banned the import of these metals. The UK made a similar decision in December 2023.

Rusal previously officially stated that US and UK sanctions do not affect the company's ability to make shipments, as they do not affect the company's global logistics solutions, access to the banking system or its production system. The US Treasury decision does not impose any new prohibitions or requirements regarding the processing, clearing or sending of payments by any intermediary banks, the aluminum producer said.

Later, a source close to Rusal told Bloomberg that sanctions could jeopardize 36% of Rusal's sales. This share corresponds to the value share of Rusal's sales to Europe in 2022 (36% of revenue). Last year, this share was 28%, the company's financials say.

Bloomberg cited preliminary estimates from Rusal that sanctions could affect at least 1.5 million tonnes in annual sales. Last year, Rusal produced 3.8 million tonnes and sold 4.2 million tonnes. As a result, Rusal may be forced to cut production, Bloomberg's source said, comparing the situation with the global financial crisis, which affected demand sharply in 2008.

This is not the first time that Rusal has had to discuss capacity reductions. Sources close to the company's creditors reported last October that Rusal was considering scenarios for closing a number of unprofitable plants amid low prices for aluminum and financial losses from the introduction of an "exchange rate-based" export duty. Rusal's Kandalaksha, Volgograd and Novokuznetsk aluminum smelters, which account for about 500,000 tonnes of the 3.83 million tonnes produced by the company in 2022, were mentioned as most vulnerable.

In addition, amid the new sanctions, it was reported that Rusal had requested measures to support the industry from the Ministry of Industry and Trade. The company proposes to consider the purchase by Rosrezerv of up to half of the company's exports at pre-April 12 sanctions prices and with exemption from export duties.

The new restrictions may cost Russian producers a loss of profitability of 2-4 percentage points due to the rise in cost of supply chains, Maxim Khudalov, chief strategist of the Vector X Investment Company said. Rusal's EBITDA margin in 2023, for comparison, fell to 6.4% from 14.5% the year before.

Reorientation to the markets of Southeast Asia will allow Rusal to resolve its sales issues, but the process will not be easy, unlike for Norilsk Nickel, since high-quality nickel produced by the company is still in short supply worldwide, and Indonesian and Philippine volumes cannot cover the shortage. Despite the increase in nickel production in Indonesia, some of which is converted into battery metal, high quality rolled steel and heat-resistant alloys still require high-quality nickel, the analyst said.

The discount on sales of Russian metal could reach nearly10%, Khudalov said.

Sanctions could significantly undermine the position of the LME as a global platform, but as an instrument within AUKUS (the union of Australia, Great Britain and the United States), it will certainly remain, since the London Exchange is a convenient platform given its significant amount of warehouses. Price quotes from the Shanghai Exchange will now be used To calculate prices for the bulk of contracts for Russian metal, Khudalov said.

Since the UK still allows metal to be traded from warehouses, the total volume of metal inventories on the LME may begin to gradually decline, which is important since previously produced metal there now accounts for from 35% (nickel) to more than 90% (aluminum) of all inventories, independent analyst Boris Sinitsyn said. As pressure on metals of Russian origin worsens (including restrictions on consumption in Europe), prices on Western exchanges will rise, which will also be reflected in prices in Asia, he said.