Europe and US Head for Clash Over Aluminum Supply as EU Weighs Russian Ban

In the impending scenario where the European Union contemplates banning Russian metal, European and U.S. markets are poised to engage in fierce competition for Middle Eastern aluminum. This development could potentially trigger price hikes akin to those observed in 2018 when sanctions were levied against Rusal, a significant aluminum producer.

A surge in demand for aluminum originating from Middle Eastern nations like the United Arab Emirates and Bahrain is expected to drive inflationary pressures for Western enterprises operating in sectors such as transportation, packaging, and construction. These industries are already grappling with elevated costs pertaining to raw materials and labor.

Aluminum holds paramount importance as a fundamental component for electric vehicles. Renowned for its lightweight properties compared to steel, aluminum has emerged as the preferred metal for an extensive array of components used in electric vehicles.

The European Union has been engaged in discussions for several months regarding potential sanctions targeting Russian aluminum. While the latest sanctions package commemorating the second anniversary of Russia's invasion of Ukraine did not include any new sanctions on aluminum, it is anticipated that the EU will soon propose another package featuring fresh import bans.

Middle Eastern producers accounted for approximately 6.2 million metric tons or nearly 9% of global aluminum supplies last year. Of this, roughly two million metric tons were shipped to Europe and the United States.

Should Russian aluminum be prohibited, Europe would face a deficit of approximately 500,000 tons, with potential mitigation from the restart of idle capacity within the region. However, it is unlikely that Middle Eastern suppliers could swiftly fill the void left by Europe's shortfall in aluminum supply.

Consequently, European premiums would need to rise to attract aluminum away from other regions, including the United States. Correspondingly, premiums in the U.S. would also need to increase to ensure a steady inflow of aluminum.

The imposition of U.S. sanctions on Russian producer Rusal in April 2018 precipitated a crisis, leading to a rapid 35% surge in aluminum prices on the London Metal Exchange (LME) to seven-year highs within a few days. European duty-paid premiums soared by 45% in the subsequent month, while U.S. premiums rose by 20% during the same period.

However, any potential price hikes in the event of a new ban are anticipated to be less pronounced compared to those witnessed in 2018, primarily due to surpluses in Asia. Moreover, Russian aluminum supply is likely to be redirected to China, which already serves as a significant recipient of Russian aluminum following Russia's invasion of Ukraine.

The magnitude of market reactions hinges on whether the LME, as a consequence of EU sanctions, opts to ban aluminum of Russian origin, which constitutes 90% of inventories in LME registered warehouses.

Notably, self-sanctioning measures and the imposition of 200% tariffs on U.S. imports have prompted many U.S. companies to diversify away from Russia towards other regions, including the Middle East.

U.S. imports of Russian aluminum plummeted to 16,902 tons last year, accounting for a mere 0.4% of the total, down from 4% in 2022 and almost 9% in 2018. Freight costs have surged due to Houthi militant attacks on vessels in the Red Sea, targeting a route crucial for facilitating East-West trade via the Suez Canal.

EU imports of aluminum from the Middle East totaled nearly 1.2 million tons, representing 18.8% of the total, while the U.S. imported over 800,000 tons, accounting for 19.3% of its total aluminum imports.