UK and US Sanctions Pose Major Challenges for Rusal’s Operations

UK and US Sanctions Pose Major Challenges for Rusal’s Operations

UK and US sanctions could critically impact Rusal, one of the world’s largest aluminum producers, potentially reducing its sales by 36%. This significant cut mirrors the volume of Rusal’s product sales to Europe in 2022 and may force the company to reduce production to levels last seen during the 2008 global financial crisis.

Bloomberg reports that the sanctions could impact at least 1.5 million tonnes of Rusal’s annual sales. With the company producing 3.8 million tonnes and selling 4.2 million tonnes last year, the required production cut could be substantial. This situation arises as the sanctions, effective from April 12, prohibit the import of new Russian-produced aluminum, copper, and nickel into the UK and US, and prevent trading of these metals on the London Metal Exchange (LME).

Historically, Rusal has considered cutting capacity at several unprofitable smelters due to low aluminum prices and financial strains from export duties. Smelters like those in Kandalaksha, Volgograd, and Novokuznetsk, which together contribute around 500,000 tonnes, were already deemed vulnerable.

The sanctions also include complexities for Rusal’s major consumer, Glencore, which may invoke force majeure to negotiate discounts or suspend purchases. Aluminium, which constitutes a significant portion of the Russian metal in LME warehouses, is notably affected, with 311,000 tonnes out of 400,000 tonnes of total stocks.

While Rusal asserts that the sanctions do not impair its delivery capabilities or access to global logistics and banking systems, market analysts are skeptical. The sanctions could reduce Russian producers’ profitability by 2-4 percentage points due to increased logistics costs. In 2023, Rusal’s EBITDA margin dropped to 6.4% from 14.5% the previous year.

The company may look to Southeast Asian markets to mitigate sales challenges, though the transition could be challenging. Unlike Nornickel, which benefits from the scarcity of high-grade nickel, Rusal might face a discount of about 10% on its metal sales. icon

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