Aluminium prices hit a series of record highs to end February and there appears to be little in the way to prevent further price increases, barring some unforeseen destruction of demand.
London Metal Exchange three-month aluminium prices surged above previous record highs at the end of February as the market reacted to Russia's invasion of Ukraine, the largest assault by a European country against another since World War Two.
The three-month aluminium contract reached an official record high of $3,445/t on February 24, added two dollars on February 28 and then reached a fresh high on the first day of March at $3,464/t.
Prices have dipped back in between the highs. Initial fears of sanctions on Russian aluminium eased after reports that key industries such as energy and aluminium may not be directly targeted, but as the fighting in Ukraine escalated the sanctions on Russia's economy have intensified.
New measures targeting Russia's financial system were introduced by the US and its allies over the weekend. The US and EU said certain Russian banks will be blocked from accessing the Swift international payments system, while Russia's central bank will be restricted from accessing its international reserves.
In 2021, Russia produced around 3.76mn t of aluminium metal, almost 6pc of global output levels. The new sanctions will effectively cut off that supply from Europe.
"If you take all that metal out, there will be a huge impact," one analyst said, noting that the sanctions in 2018 resulted in huge price increases.
US sanctions against Russian aluminium producer Rusal in 2018 caused aluminium prices to rise around 30pc in the immediate aftermath as buyers sought alternative material.
But prices are almost $1,000/t higher now than they were then. The sanctions come at a time when aluminium prices were already approaching record levels after high energy costs forced a number of production facility closures in recent months.
The latest sanctions are not the only way in which the Russian invasion has hit aluminium supply chains, as Rusal said today that it had halted production at the 1.7mn t/yr Nikolaev alumina refinery in Ukraine.
Not only will the sanctions pile pressure on already high aluminium prices, they will do the same in the energy market as Russia is a major supplier of oil and gas.
Additionally, since earlier in the Covid-19 pandemic, China has been a net importer of aluminium, having been a net exporter for most of this century. Chinese domestic aluminium production dropped by 7.82pc on the year in January to 3.1mn t after production cuts due to power shortages and new Covid-19 lockdowns in Guanxi province.
One analyst estimated Chinese smelter operating rates are at less than 70pc. While production rates reportedly improved in February as the latest lockdowns were eased, output remains below last year's levels.
All of these factors point to higher prices to come even atop the latest record levels. A research note from Goldman Sachs this week mused that the only thing that could see prices fall back significantly from these highs is a significant destruction of demand.
But although some markets remain restricted in their demand for aluminium raw material, such as the automotive industry where the continuing shortage of semiconductors for vehicles saw US automaker Ford cut its full-size truck and SUV production this week, demand is solid across other sectors and is not expected to falter in the coming weeks and months.
China is expected to increase stimulus spending in response to slowing economic growth and a weakening real estate market, which will benefit the aluminium market, as will the accelerating shift to greener energy sourcing.
