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Aluminium is having wildest week after Rusal sanctions shock

The US's decision to blacklist United Co Rusal, the world's second-biggest aluminum maker, set off a rush to secure supply.

It's been an unprecedented week for aluminium.

The US's decision to blacklist United Co Rusal, the world's second-biggest aluminum maker, set off a rush to secure supply. Prices rose by a record this week, with ripple effects felt by car-parts makers in Atlanta, Swiss commodity traders and processing plants in the Irish countryside.

"There's a scramble to replace Russian material with non-Russian material, which in some cases should be doable, but in others not so much," Robin Bhar, an analyst at Societe Generale, said from London.

The sanctions are having an immediate and disruptive effect on global supply chains, which feed raw material into cars, planes and packaging. Rusal accounts for about 6 per cent of the global aluminium market and is now completely cut off from the Western financial system.

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Aluminium surged 12 per cent this week, the biggest increase since the London Metal Exchange launched the current version of the contract in 1987. On Friday, prices retreated from near a six-year high as the metal fell by 1.7 per cent to settle at US$2,285 a metric ton at 5.52pm in London.

"Everybody's been forced to take a hard look at aluminium," said Fiona Boal, the director of commodity research at London-based Fulcrum Asset Management, which has US$7 billion under management. "We haven't seen that contagion risk for a number of years."

Analysts at ICBC Standard Bank said they don't expect a sudden shortage of primary aluminium worldwide, but the impact will be in regional premiums and more specialised downstream markets.

"Exactly how the aerospace, packaging, electronics and, to a degree, automobile consumers of Rusal material resolve this problem is currently very unclear," the analysts said.

Customers fearing a supply crunch are snapping up stockpiles on the LME. On Friday, cancelled warrants rose 35 per cent to 370,350 tons, the biggest increase since 2011. The measure tracks orders for aluminium in warehouses monitored by the exchange.

"We are not sure how Rusal's supply will come back into the market," said Cameron Karami, an analyst at Natixis SA in London. "Short-term inventory will get drawn down."

Premiums Skyrocket

One example of customers rushing for material - the US premium, a measure of the cost to secure LME aluminum and ship it to the Midwest, jumped this week by the most on record.

The duty-paid premium by consumers to suppliers surged to a range of 21.75 US cents to 23.55 US cents a pound, according to Austin, Texas-based researcher Harbor Intelligence, up from a prior range of 17.25-18 US cents.

Rivals Benefit

Rusal's competitors have climbed since the US sanctions were announced late last week. Alcoa and Century Aluminum are among the US-based winners with gains of 15 per cent and 7.1 per cent, respectively, while Norsk Hydro ASA is up 9.1 per cent.

Spreads Blow Out

The structure of the aluminium market has flipped into backwardation. The rush to secure metal from the exchange has pushed aluminium for delivery now above prices further in the future. One-year metal is US$87 a ton more expensive than one-month, the most since 2007.

Alumina Leaps

The price of alumina, the key ingredient for making aluminium, is approaching an all-time high. Rusal declared force majeure on some alumina shipments on Thursday, according to a person familiar with the matter. And that's on top of production cuts at the world's top alumina refinery in Brazil.

Prices in the Atlantic market are at US$565 a metric ton, according to consultancy CRU Group, up 26 per cent in the past week.

"Prices show no sign yet of approaching a ceiling," said Anthony Everiss, senior consultant at CRU.