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Potential U.S. sanctions against Russian aluminum

Aluminum, considered the most widely used base metal, is a key raw material in several manufacturing industries. It is used in transportation, packaging, machinery, and electronics. In the automobile sector, aluminum is used for the vehicle frame and body, wheels, and engine due to its low density. In electronics manufacturing, it is used for microelectronic components such as capacitors, and power systems. Recently, five associations representing manufacturing industries in several European countries voiced concerns that thousands of businesses will likely fall into insolvency if Russian aluminum is taken out of supply.

Biden administration eyes various scenarios

The Biden administration is currently considering three options regarding sanctions on Russian aluminum: a complete ban on direct Russian aluminum imports; increasing tariffs to a level that would effectively ban Russian aluminum; or sanctioning the Russian aluminum company Rusal, the largest aluminum producer outside of China.

A complete U.S. ban on Russian imports or increased tariffs on Russian aluminum would likely have a limited impact on the global market. Russia is not a significant supplier of aluminum to the U.S., and Russian aluminum exports would likely shift to sanction-neutral countries. These neutral countries could then use the imported aluminum for their own domestic manufacturing processes, while freeing their domestic aluminum production to fill the gap in global supply with their own aluminum exports. Unless the U.S. ban is accompanied by a European Union (EU) or LME ban, any price spikes would therefore be relatively short-lived.

The more disruptive option would be sanctioning Russian aluminum manufacturer Rusal. Rusal is the largest aluminum producer outside of China and the only primary aluminum manufacturer in Russia. Similar sanctions in April 2018 led to severe price spikes before the sanctions were eventually lifted in January 2019.

Rusal is heavily involved in the overall supply chain for aluminum production globally, being a major provider of bauxite and alumina, two essential components of aluminum manufacturing. When U.S. sanctions were enforced in 2018, aluminum smelters in Europe struggled to secure enough raw material for domestic production. Sanctions would likely make other potential importers cautious about taking Russian aluminum, since it could expose them to secondary sanctions, ultimately blocking them from the U.S. market.

Sanctions would also force the LME to act. The LME is a one of the world’s major centers for trading industrial metals, hosting a majority of the world’s non-ferrous metal trading, including aluminum. The LME provides producers and customers with a physical market of last resort, allowing involved producers and customers to take delivery of metal in times of under-supply and make delivery in times of over-supply. When the U.S. imposed sanctions in 2018, the LME banned users from delivering any materials produced by Rusal into the market’s global warehouse, which forced the Russian supplier to find other willing customers, disrupting global trade flows.

Soaring energy costs reduce European aluminum output

Potential U.S. sanctions are set against the backdrop of the ongoing European energy crisis which has seen soaring energy prices disrupt production processes across the continent. Since the end of 2021, aluminum smelters across Europe have announced major production cuts, resulting in a large fall in regional aluminum output. This has made companies increasingly reliant on Russian products.

Smelting aluminum requires high electricity usage during the electrolytic process. Smelters are notoriously difficult to run in a cost-efficient manner and are usually set up near existing power stations for this reason. Since late 2021, Europe-wide cuts to aluminum smelter output led to an overall reduction of 850,000 tons of primary aluminum. Any ban on Russian aluminum, or sanctions that increase the price, will only deepen the availability issues for many businesses.

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