Russia's invasion of Ukraine to impact global aluminum supply; nickel prices surge

Russia's invasion of Ukraine is expected to have a significant impact on global aluminum supply and prices, while the news sent nickel prices on the Shanghai Futures Exchange to a historic high Feb. 24.

The most-active nickel contract traded on the Shanghai Futures Exchange hit a historic high Feb. 24 as markets remain concerned about available inventories and export flow into China.

The nickel contract for April delivery closed at an all-time high of Yuan 179,540/mt ($28,396.8/mt) Feb. 24, up 2.46% from the previous close and 26.1% higher from a year earlier, SHFE data showed.

Meanwhile, the most-active aluminum contract for April delivery on the SHFE extended its stay above the crucial level of Yuan 22,000/mt, closing at Yuan 22,950/mt Feb. 24, up 0.6% from the previous close, SHFE data showed.

Aluminium prices have remained at elevated levels in recent weeks on supply concerns after European primary aluminum smelters were forced to cut their output due to energy crisis as they entered 2022.

EU's output curbs may widen as the invasion has added uncertainty to Europe's natural gas supply, sources said, raising concerns around tight global supply and elevated prices.

However, some industry sources said the US may not impose sanctions on Russia's aluminium exports due to the trade flow issues faced by the global markets four years back.

Russia-based Rusal is one of the largest aluminium producers across the world and plays a vital role in global supplies.

The US in 2018 put sanctions on Rusal's operations, which led to severe supply tightness and pushed up global aluminum prices to a seven-year high, eventually leading to significant rise in production costs for downstream manufacturers.

Rusal's aluminum production totaled 3.76 million mt in 2021, the company said in its annual report Feb. 9.

China's import arbitrage window for primary aluminum remains closed for now as imports have become expensive amid output cuts by smelters in Europe.

Nickel situation

Russian nickel is SHFE's key delivery product, and the full-blown crisis in the region could further tighten SHFE's nickel warehouse receipt volume, industry sources said.

In the week to Feb. 18, SHFE's refined nickel stocks were at 16,000 mt, down 1,300 mt from the previous week, falling to a historic low level, the SHFE data showed.

China's 2022 nickel demand is expected to rise to 1.655 million mt, up 7.3% on the year, while global nickel demand in 2022 will rise 9.4% on the year to 3.05 million mt, latest data by state-run metal consultancy Antaike showed.

As China goes through an explosive growth in its new energy vehicle space, the country's demand for nickel has also risen.

Share of nickel in NEV power battery grew to 15% in 2021 from 10% in the previous year, according to Antaike data.

Suzhou-based Soochow Futures said as Russian nickel has managed to create a vital place in China's nickel market. If nickel exports from Russia get impacted in the future, this could tighten nickel supply in China, further squeezing SHFE's nickel warehouse receipt volume, it said.

According to Guangzhou-based Huatai Futures, the Russia-Ukraine crisis could weigh on global nickel supply.

Russia's primary nickel output of 146,000 mt in 2021 accounted for 5% of the world's total, and if the conflict worsens, this could weigh on the global nickel supply, Huatai said.

China imported 46,000 mt of nickel ingot from Russia in 2021, accounting for 18% of national nickel imports, its customs data showed.

While nickel supply in the near term could tighten due to worsening crisis in the Black Sea region, industry analysts said nickel supply into China can improve in Q2 and Q3 on the expectations of Indonesia gradually raising its nickel output capacity later this year.

The biggest impact from Russia-Ukraine crisis, however, could be worsening energy shortage, which other than impacting Russia's metal capacity may also hit nonferrous metals output capacity in Europe, analysts said.

The Russia-Ukraine conflict could hit both Russian and European metal output capacity, as higher natural gas prices would hike power costs and negatively impact production.

Copper markets

The Russia-Ukraine crisis is expected to affect the copper supply side more than the demand side, sources said.

A major international trader who held a large volume of Russian refined copper is selling off now, worrying about Russian exports may face sanctions by the US, market sources said.

The sellers, traders in particular, are selling off their goods now due to the huge backwardation, which means they will suffer losses, they added.

In 2021, Russia produced 886,000 mt copper concentrates in 2021, while Europe churned out 3.02 million mt of refined copper, Huatai's data showed.