Prices for aluminum raw material alumina surge after Rio Tinto force majeure

MELBOURNE (Reuters) - Prices of alumina, the raw material for making aluminum, have surged after Rio Tinto said it could not fulfil supply contracts because of U.S. sanctions on United Company Rusal, adding to a crunch rippling through the aluminum supply chain.

Aluminium bar stock is seen inside a factory in Dongguan, China April 10, 2018. Picture taken April 10, 2018. REUTERS/Bobby Yip

Rio said it was in the process of declaring force majeure on Friday for certain customer contracts that likely include alumina shipments from a refinery it operates with Rusal in Australia, bauxite shipments to a Rusal alumina refinery in Ireland, as well as alumina from that refinery to smelters in Europe.

Force majeure is a legal term describing situations when a contract cannot be fulfilled because of forces beyond a company’s control.

Alumina is a compound extracted from bauxite ore that is then smelted to form aluminum.

COMEX alumina futures for delivery in May jumped 15 percent on Friday following the Rio curtailment.

The futures are up 22 percent since April 6 when the United States imposed the sanctions on Rusal as part of broader sanctions against Russian companies and owners in response to allegations of Russian government interference in the 2016 U.S. presidential election.

Prices for spot physical cargoes of alumina from Australia are $550 per ton, said two traders that participate in the market on Wednesday, but that was likely to rise.

The Rio announcement and the Rusal sanctions add to global alumina supply constraints after Norsk Hydro’s Alunorte, operator of the world’s biggest alumina refinery, was ordered to shut half of its output amid an investigation into allegations the site contaminated local water supplies.

Alunorte and Rusal, the world’s second-biggest aluminum producer, account for 11 percent of global alumina production.

Internally, Rio Tinto’s Dunkirk smelter in France, which buys alumina from Rusal’s refinery in Ireland, has only three weeks of alumina stockpiles, Johan Vlietinck, an official with France’s CGT union at Aluminium Dunkerque told Reuters.

The company is searching for alternative supplies, he said.

The disruption to the supply chain and the higher alumina prices will spill over to semi-manufactured aluminum and ultimately hit manufacturers of products such as beer cans, cars and construction materials.

“This is going to be domino effect all over the place,” said Paul Adkins, Managing Director of consultancy AZ Aluminium in China.

“It’s just a total supply equation -- there’s not enough to go around. That’s going to have a knock on effect downstream.”

It takes around 2 tonnes of alumina to make 1 ton of aluminum.

Global aluminum prices rose to their highest since September 2011 on Wednesday, climbing to as much as $2,445 per ton.

“Phones have been ringing off the hook with people looking for extra metal,” said a source at a smelter in Asia. “They are looking for any extra tonnes, even just a few hundred.”

Reporting by Melanie Burton in MELBOURNE, Gus Trompiz in PARIS and Eric Onstad in LONDON; Editing by Christian Schmollinger