Rusal suspends 20%-25% of alumina output with halt of Ukraine refinery on customs dispute

London — The suspension of Rusal's second-largest alumina refinery at Nikolaev in southern Ukraine as its feedstock depletes to critical levels due to local customs blocking its inbound bauxite shipments could translate into a 20%-25% cut in Rusal's self-sufficiency in alumina, S&P Global Platts calculations Friday showed.

The refinery in Nikolaev, 100 km east of Odessa, said Thursday its bauxite feedstock supply had fallen to four day's worth of operations, and a three-day supply would require full stoppage.

Industry source said a lasting stoppage was unlikely given it was due to a local dispute.

Nikolaev is Rusal's first asset to suspend production amid the coronavirus pandemic and global aluminum surplus. In March, Rusal said the restrictions needed to combat the spread of coronavirus might force it to suspend operations at its largest alumina refinery, the 1.9 million mt/year Aughinish Alumina in Ireland, but so far, all of its refineries and smelters are continuing to operate normally.

Elaborating on why customs was detaining its raw material arrivals at the port, the refinery in a statement said it assumed its exemption from customs duties has caused discontent.

Under Ukraine's Customs Code, the Nikolaev refinery is entitled to import raw materials duty free as it provides processing services by converting bauxite to alumina and exporting its entire output due to a lack of domestic demand. Its management has asked Urkainian President Vladimir Zelensky to resolve the issue with the customs agency, the refinery said.

With output in 2019 at 1.7 million mt at close to full capacity, Nikolaev contributed 21.5% of Rusal's 7.86 million mt alumina production in the year and fed into 850,000 mt, or 22.5%, of its aluminum output — at the conversion rate of 2 mt of alumina per tonne of metal.

Coincidentally, Nikolaev's 1.7 million mt production was comparable to the alumina volume that Rusal bought and sold on the open market. The company's respective procurement and third party sales each came to little over 1.7 million mt last year, according to its website.

However, it is likely to be the output of its Irish Aughinish Alumina that Rusal sells externally, with Nikolaev's output most probably feeding the company's own smelters, a Moscow-based industry source said.

BAUXITE SUPPLY CHALLENGE

The source suggested Nikolaev gets its bauxite from Rusal's operations in Guinea, possibly from Kindia. "Refineries are rather sensitive to the type of bauxites they use. If Nikolaev could not ship in the Guinean material, it will struggle to operate," he said, adding he doubted the refinery would remain idled for long.

"Nikolaev was sustaining operations during much worse times of the military conflict [in 2014]," he said. "Now it simply has a minor dispute with local bureaucrats. Surely it will be resolved soon and in favor of the refinery, given it is pretty much a town-forming enterprise and mothballing it would mean quite a bit of the town's population will become redundant," he added.

A Rusal spokeswoman could not specify the source of the bauxite used by Nikolaev. To make up for the withdrawn volume, the parent company may have to step up alumina procurements on the open market, she said.

The source suggested there was a probability that Rusal will have to reduce its full year 2020 aluminum production, but not because of this incident. Its final output may fall 5%-10% from 2019 due to the impact of coronavirus lockdowns on the world market, with the largest cut potentially to be seen in sales of value-added aluminum products. These are more difficult to sell due to the current suppressed end-user demand and fewer traders interested in buying VAP at all, he said.

Value-added products comprise all aluminum products that are not ingots, although Rusal also includes alloyed and high purity ingots in the category.