Glencore, the global miner and commodity trader has been forced to declare force majeure on aluminium supply contracts thanks to tougher US sanctions against Rusal, the key Russian global aluminium producer.
The news comes five days after the US slapped new sanctions on Russian individuals and companies, including on Rusal as part of a sanctions imposition against other Russian companies and business people, all of whom are close to Russian president Vladimir Putin.
The declaration of force majeure (a legal way for a supplier to avoid meeting the terms of a contract) over 50,000 tonnes of Russian metal (worth over $US100 million at current prices) has enormous complications for the global aluminium and metals markets generally.
Rusal is the world’s biggest aluminium producer outside China and last year it produced 3.7 million tonnes of the metal, to be used in everything from drinks cans to cars and aircraft.
That’s equal to around 5% of global production (which totalled 63.4 million tonnes in 2017. China produced 32.755 million tonnes, so the Rusal output is actually a solid 11% of non Chinese output, which will make a dent in global supplies and eventually push metal prices higher.
But it could see global bauxite and alumina prices come under pressure as suppliers to Rusal try and dump their unwanted product.
The 50,000 tonnes of metal was destined for one of Glencore’s customers but now Glencore will have to either source it from the market or other producers (perhaps in China which doesn’t import any metal).
Glencore is the biggest buyer of Rusal metal, purchasing $US2.4 billion of aluminium last year and has links to the company reaching back to 2007 when Glencore’s aluminium assets were merged with those of Rusal.
According to Wikipedia The company is incorporated in the uK channel island of Jersey where it has its financial centre, but its headquarters are in Moscow. UC Rusal shares are traded on the Moscow Stock Exchange, Hong Kong Stock Exchange and European Stock Exchange.
The news came as the Russian Government said on Wednesday it was ready to provide short-term liquidity to Rusal, which is controlled by tycoon Oleg Deripaska. The sanctions effectively stop Rusal from conducting any trades in US dollars. The greenback is the transaction currency for global commodities.
Force majeure allows both parties in a contract to walk away from the deal in the event of an extraordinary event or circumstance beyond their control.
The move came a day after Glencore chief executive Ivan Glasenberg resigned from the board of Rusal and put on hold a share swap deal involving another one of Mr Deripaska companies.
On Tuesday, the London Metal Exchange made life even harder for Rusal and its traders and customers when it said it would not allow Rusal metal produced after the sanctions were announced to enter its system.
And in a separate move, US ratings groups, Moody’s and Fitch both on Wednesday withdrew their rating of Rusal’s debt. Fitch cited the sanctions for its decision. It also took the opportunity to cut its outlook on Rusal’s BB- rating from ‘negative’ from ‘watch evolving’.
Moody’s provided fewer details. It did not specifically mention the sanctions, just saying that the decision was made “for business reasons.” The group affirmed Rusal’s Ba3* rating in September.
Rusal shares are listed in Hong kong and the shares have fallen by more than 50% in the past month when tougher sanctions against Russia were first rumoured. But they rose more than 4% yesterday on a sympathy bounce.
Glencore shares are down 10.7% in thelast month and more than 12% year to date.
Finally, FTSE Russell, the share index, provider, said it will drop Rusal from its Global and Emerging Markets indices, meaning it will be even more unattractive for big global investors.
