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Sanctions on Russia Rattle Aluminum Industry, Manufacturers

7 May 2018 11:00 am
By Amrith Ramkumar, Scott Patterson and Sarah McFarlane 

Wild swings in aluminum prices have jolted buyers and sellers of the metal, threatening profits of companies that make everything from jets to beer cans.

Last month, the U.S. sanctioned a big Russian aluminum producer, curtailing supplies. In some cases, buyers delayed shipments or canceled orders. Others have left shipments of the metal they received untouched, fearful of falling afoul of Washington's restrictions.

Aluminum executives say they can't remember anything as jolting to the industry. Jeff Henderson, president of the Aluminum Extruders Council, which represents aluminum-product makers, says he was flooded with calls in the first few days following the announcement of the sanctions on April 6.

"The aftereffects were complete shock and awe to the industry," Mr. Henderson said.

The price for aluminum deliveries in three months' time has hit a more than six-year high. During April, prices also swung over their widest monthly range since at least 1997, the oldest data available, according to an analysis by WSJ Market Data Group.

The volatility in aluminum threatens to squeeze profit margins of large companies that use the metal, at a time when higher fuel prices are already worrying manufacturers. The unpredictable aluminum prices also have contributed to worries over higher inflation, giving the Federal Reserve a freer hand to raise borrowing costs, which could become an added challenge for some companies. Trade tensions between Washington and much of the rest of the world are also a big, new worry.

Consumers could get pinched, too, if prices stay high and companies pass on costs. Aluminum prices have eased somewhat after the U.S. Treasury spelled out ways for the sanctioned Russian company, United Co. Rusal, the world's second-largest producer, to win relief. But the process could be lengthy, and industry veterans are bracing for continued volatility.

Two weeks after Washington announced the Rusal sanctions, aluminum prices peaked intraday around $2,700 a metric ton, or 35% higher than pre-sanctions levels. As traders bet that the U.S. might reverse course because European companies complained that Rusal metal is vital to their operations, prices retreated.

They extended declines when the U.S. softened its stance on Rusal and when sanctioned majority owner, Russian billionaire Oleg Deripaska, agreed to sell his stake in the company to get it off Washington's list. Still, aluminum remains 17% higher than they were before the sanctions, as there are few obvious buyers of Mr. Deripaska's stake, and Washington will scrutinize any transaction to ensure a real transfer of control.

The sanctions have coincided with Trump administration tariffs on steel and aluminum imports, further limiting supply options for American buyers. That has boosted premiums for aluminum deliveries in the U.S.

Russia, primarily through Rusal, supplied about 12% of all aluminum demand in the U.S. in 2017, according to the Aluminum Association, a U.S. trade group. Analysts expect the company's exports to halve over the next six months, as buyers move to find alternative suppliers ahead of the Treasury's deadline for investors to exit dealings with Rusal.

Rusal's deliveries in ports such as Baltimore and Houston are sitting unopened, their customers worried that taking delivery might violate sanctions, said Jorge Vazquez, founder of Harbor Aluminum Intelligence, an Austin, Texas, consultancy whose clients include aluminum companies, banks and hedge funds.

Mike Rapport, president of Corona, Calif.-based Merit Aluminum Corp., said he shrugged his shoulders when he first heard about the sanctions. Then calls from companies he buys aluminum from started flooding in. "My suppliers were freaking out," Mr. Rapport said. "It was pandemonium."

Merit Aluminum buys the metal to make products like window frames and car parts. Mr. Rapport said suppliers have canceled deliveries, raising the prospect that he won't be able to meet his own customers' demands. He is now weighing whether to cancel an expansion to his factory.

Aluminum isn't the only metal affected by the Trump administration moves. Steel prices in the U.S. have climbed as much as 30% this year because of the tariffs, though they have fallen back somewhat more recently. Nickel and palladium were swept up in the turmoil because of their ties to Russia as a supply source.

Executives at some of the world's biggest multinationals are fretting that all the disruption could hit their bottom lines. In recent weeks, executives at Boeing Co., Ford Motor Co. and Caterpillar Inc. all pointed to rising metals costs as potential headwinds.

The threat of higher costs has weighed on metal-intensive companies. Industrial stocks in the S&P 500 have fallen in nine of the last 12 trading sessions. The group has slumped 9.6% since the start of February, compared with a 5.7% drop by the broader index.

Whirlpool Corp. shares have slid 18% from their Jan. 26 peak of $185.97. While the home-appliances giant has benefited from favorable tax changes and tariffs on foreign-made washing machines, volatile steel and aluminum prices kept executives from raising their full-year earnings guidance.

"Raw material weighs pretty heavily in all parts of our global businesses," Whirlpool Chief Executive Marc Bitzer told analysts on a call late last month. "That's the prime reason why we still see" risk, he said.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com, Scott Patterson at scott.patterson@wsj.com and Sarah McFarlane at sarah.mcfarlane@wsj.com

(END) Dow Jones Newswires

May 07, 2018 07:00 ET (11:00 GMT)

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