Yesterday evening, in a surprise development, the US Treasury Department announced it was to extend the time limit (for the US and non-US citizens) to end business ties with Rusal until 23 October 2018.

Moreover, it is claimed in numerous media reports that the US could consider easing sanctions against Rusal – if Oleg Deripaska (Rusal’s largest shareholder) sells his stake.

As a consequence, the LME aluminium price plummeted (c.10%) yesterday – hitting a day low of $2,237/t vs. a seven-year high (hit only last week) of c.$2,600/t. Today, Rusal’s share price closed c.43% higher on the Hong Kong Stock Exchange.

In this regard, so far there has been no official comment from Rusal.

With yet another about-turn by the Trump administration, it is clear that the decision to impose sanctions was taken in haste and its after-effects (for the western world) were only realised at a later stage.

Apart from increasing aluminium prices, alumina prices (a critical input in aluminium-making) hit an ‘all-time’ high of >$700/t – up c.80% since the sanctions were unleashed.

This insane price reaction has caught many western world smelters off-guard. Remember, the alumina market situation has also been aggravated by the 50% output cut at Alunorte (world’s largest alumina refinery) on allegations of a toxic spill from the refinery polluting a nearby waterbody.

There have been media reports suggesting that many European smelters could be forced to either operate below capacity or temporarily shutdown facilities.

Moreover, this is feared to have bigger ramifications for other industries (such as automobiles, aircraft and can/foil-makers) in the aluminium value chain. There is a reasonable possibility that the western world leaders (particularly from Europe) played an instrumental role in engaging with the US and securing some interim relief – at least until when alternative alumina supply agreements are struck.

It would be interesting to see, how (and/or if at all) China helps fill-in the (alumina) supply deficit – especially amid its on-going trade tensions with the US.

Since the Russian State always had an implicit interest in reviving Rusal, even when the aluminium-major was struggling with its humungous debt obligations, it shouldn’t be a daunting task for them to get Oleg Deripaska to sell his stake – even if it was to be just an ‘on-paper’ adherence to the US conditions.

At the end of the day, Rusal remains a key vehicle to earn USD-denominated cash flows and, hence, Russia is expected to do anything possible to withstand the impact of the recent sanctions.

Although, it remains to be seen if that scenario would be acceptable to the US administration.

With this relief, the immediate-term earnings impact may not be as severe as factored in our (2018) estimates. We maintain our strong upside on Rusal.

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