Global aluminium and alumina prices soared to six year highs on Friday as the impact of the sanctions on the big Russian controlled aluminium producer, Rusal continued to rattle global markets. That has seen Rio Tinto forced to join Glencore in being forced to declare force majeure on deals it has with Rusal.
Rio Tinto said at the weekend that it will declare force majeure (which will allow it to walk away from a contract) on bauxite supply contracts with a giant alumina refinery in Ireland controlled by Rusal group amid fears for the certainty ofoutput from Rio’s big refinery in Queensland where Rusal owns 20%.
Rusal is controlled by Vladimir Putin confidant, the Russian billionaire Oleg Deripaska.
Rio is due to release its March quarter production and sales report on Wednesday.
Rio shares were up 6.8% to $78.18 last week, as investors reacted positively to the news of the sanctions without understanding the impact on the Gladstone refinery in Queensland
Shares in Alumina, the bauxite and alumina associate of Alcoa rose 8.4% to $2.59 over the week. Investors see it making big gains from the surge in global alumina prices last week.
Rio is closely linked to Rusal which owns a 20% stake in its huge Yarwun alumina refinery at Gladstone in central Queensland. Rio Tinto Alcan, Rio’s aluminium sector group, owns the other 80%. Yarwun produces around 3.4 million tonnes of alumina a year.
That shareholding could force Rio to shut the Gladstone plant because it is linked to Rusal and the tough sanctions imposed by the US government.
If Rio can’t vary the terms of those sanctions as it applies to the Gladstone plant, it could be forced to lay off hundreds of employees, while the move will put the operation of its Boyne Island smelter in doubt.
More than 900 people are employed at Yarwun, while over 600 are employed at Boyne Island.
Rio said in the statement that it was in the process of declaring force majeure on a number of its deals with Rusal. These include an agreement to supply bauxite, the basic raw material used in aluminium, to Rusal’s Aughinish plant in Limerick, Ireland.
"Rio Tinto has reviewed arrangements it has with impacted entities. The arrangements include Rusal’s 20 per cent interest in Queensland Alumina Limited in Australia, including Rusal’s associated supply and offtake arrangements, bauxite sales to Rusal’s refinery in Ireland and offtake contracts for alumina that are used at Rio Tinto’s smelters, mainly in France and Iceland,” Rio said in the statement.
Rio’s statement follows a similar statement midweek from Glencore which said it was declatrng force majeure on a deal to buy 50,000 tonnes of aluminium from Rusal.
Force majeure allows either party in a contract to walk away from the deal in the event of an extraordinary event or circumstance beyond their control.
“As a result of the imposition of these sanctions, Rio Tinto is in the process of declaring force majeure on certain contracts and is working with its customers to minimise any disruption in supply,” the company said in a statement.
Bauxite ore is mined at Weipa in north Queensland by Rio and shipped to overseas buyers (in China, for example) or to Gladstone where it is turned into alumina and either exported, or sent to the nearby Boyne Island smelter for conversion into aluminium.
Rio’s move will add confusion to the aluminium and alumina and bauxite markets. Global alumina prices jumped 17% to an eight-year high of $US556 a tonne on Friday, according to the Metal Bulletin.
Aluminium prices hit six year highs on the London Metal Exchange on Friday as well. London Metal Exchange aluminium hit its highest since March 2012 at $US2,340 a tonne.
It closed at $US2,302.50 up nearly 14% for the week and the biggest one-week rise since the contract was launched in its current form in 1987, according to Reuters.
Not only is Rio the largest supplier of bauxite to the plant, it also a significant customer, buying the alumina it produces for its aluminium smelters in Europe.
These include its 280,000 tonne-a-year Dunkirk smelter in France that it recently agreed to sell to Angle Indian businessman Sanjeev Gupta (who bought the steel plant at Whyalla last year).
Rio will now have to supply these smelters from other sources, a move that could lead to further tightness in the alumina market.
“It’s going to be difficult for them [Rusal] to keep the plant running,” said Justin Hughes, head of aluminium raw materials at consultancy CRU. “They are stuck between sanctions on both the input and output side. I feel they are going to struggle to keep that refinery online.”
The sanctions announced by the US 10 days ago, designed to punish the Kremlin for “destabilising activities”, have effectively barred Rusal and other companies controlled by Mr Deripaska from accessing the US financial system.
“Rio Tinto is fully committed to complying with US sanctions,” Rio said in Friday’s statement.