Guinea coup inflate aluminum prices — what awaits Russian consumers?

World aluminum prices have updated a ten-year high, reaching the level of $2,700 per tonne on the London Metal Exchange (LME). The sharp jump occurred against the background of the news about a military coup in Guinea, which is one of the world's largest suppliers of ore and has the largest reserves in the world. Artur Safiulin, a columnist for Realnoe Vremya, economist with many years of banking experience, reflects on how high prices and supply disruptions can affect domestic aluminum producers and, ultimately, all Russian consumers of final products. After all, aluminum is highly represented on store shelves, albeit somewhat indirectly, plus it is actively used in the finishing and construction industry.

Situation in the world

It should be noted that since the beginning of 2021 aluminum has increased in price by 40%. The world economy, which is gradually recovering, shows an excessive demand for this metal. This is especially noticeable in the markets of Europe and the United States, where aluminum is very much in demand in the manufacturing industry, in the production of a wide range of products — from beer cans to cars and airplanes. The problems of transport logistics of raw materials from Asia, the region with key reserves of this metal, are also superimposed on the increased demand. The spread of the delta strain of coronavirus makes deliveries difficult due to quarantine restrictions. Another driver of price growth is the increased price of electricity: aluminum industry is very energy-intensive in the production of metal from ore. Another important factor is the reduction of aluminum production in China.

At the moment, the largest volumes of world aluminum production are located in China — 57% of the world market. It is followed by Russia and India with shares of 5,5%, Canada — 4,8%.

Last weekend, a military coup took place in the small African country of Guinea: the current president was overthrown, the government was dissolved, the constitution was suspended, a complete change of provincial governors and city prefects began. It would seem, well, whatever. But Guinea is the second largest producer of bauxite — the raw material for the production of aluminum. According to experts, 20% of the world's aluminum production depends on the supply of ore (bauxite) from this country. Besides, it is worth taking into account the fact that Guinea has the largest reserves of this raw material in the world — about 50% of all world reserves. The serious position of a small and very poor country. Therefore, political stability in it is always super important for the calmness of the aluminum market. Which they lost in one day. It is worth noting that most of the world's metal producers have interests in the country — Chalco, Alcoa, Rio Tinto and our Russian RUSAL (which we will talk about later). Guinea is the main supplier (along with Australia) of raw materials for the needs of the aluminum industry in China: out of 84,2 million tonnes of bauxite exported in 2020, most of it went there.

Given the above, it is no surprise the market fears that the new administration of the country will reconsider current contracts for feedstock buyers whose producing enterprises operate in Guinea. Of course, such a poor country cannot organise one purely national feedstock producer and rightfully sell on behalf of one entity being content with concession agreements. Organisers of the coup hurried to assure the public they would provide “a favourable regime for foreign investments in the country.” It is a standard formulation in general. There was lifted the curfew in districts where ore mining enterprises work, at the moment they are operating as usual. This measure calmed the markets down a bit, but a lot of big companies will be ready to evacuate the staff from the country in case of further escalation of political instability. Consequently, prices for end products of world aluminium giants will keep growing because of the rise in the prime cost. The latter will influence various products we — end consumers — consume. The chain is very simple and logical.

The situation in Russia, prospects for RUSAL and consumers

As one of the world aluminium market tycoons, Russia’s largest aluminium producer RUSAL produces 40% of its bauxites and 5% of its aluminium in Guinea. The company has three bauxite assets in the country, one of which (Kindia) is the biggest feedstock asset of RUSAL — 25% of the company’s all bauxites are produced here. Moreover, the report in the first half of 2021 reads that Guinean companies of the group produced 3,8 million bauxites, which is already 50% of all production of the group. RUSAL has production capacities in Russia, but it is impossible to expand them — the reserves are limited. Plus, its prime cost will be much higher than that of imported bauxite. High export duties equal to 15% imposed by the government to balance the domestic market became an additional restriction for investments in production development in Russia. We all remember the unrestrained growth of prices for metals this year.

According to the latest news, RUSAL’s supply is already cut off from the capital’s port, shipments take place only at the port of Kamsar where freight is transhipped from the group’s producing asset. But it is just 40% of bauxite supplies from the Guinea assets of the company.

The intention of the Russian government to reduce export duties on some metals, including aluminium, became positive news for the company. The duties eat up a big part of the company’s profit. Feedstock supply disruptions are compensated by smaller production of the end product, consequently, a higher market price. In any case, RUSAL will be at an advantage.

What awaits ordinary consumers and the country’s budget? A rise in Russian aluminium producers’ revenue will lead to bigger taxes paid to the budget, which is an undoubted plus for the government. Some experts assume that the exchange price growth shouldn’t influence products for domestic consumption. The logic is simple: Russia has both feedstock and production capacities. The main question is if the government can save producers from the temptation of exporting everything, leaving our processing industry without feedstock. The intentions of reducing export duties don’t allow saying this for sure, I think.

To sum up, I would like to note that due to the news from Guinea, RUSAL stock rates increased besides the growth in the price for aluminium — by 7-14% (Moscow Exchange, Hong Kong Exchange). This is classic “Buy by hearsay, sell according to facts.” The market always develops with expectations, and it is no surprise that the market started to add potential supply disruptions from Guinea that in a worst-case scenario will certainly lead to lower demand for aluminium in the market to the aluminium price. Tough times await us as consumers: it is not excluded that the impact of the higher prime cost will be compensated from our pocket through a rise in prices for aluminium end products — from packaging to cars and gadgets.

Artur Safiulin

The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial.