South32, which operates the Worsley refinery near Collie, is benefiting from the rise in the alumina price. Photo: South32

Gains to be had as sanctions bite

Tuesday, 17 April, 2018 - 11:58

AT first glance Western Australia and Russia don’t appear to have a lot in common, until you consider exports, which are remarkably similar.

As is often the case with resources-driven economies, when one fades the other benefits; and while it’s not a boom, WA is shaping as a beneficiary of Russia’s sanctions-driven exile from global markets.

Alumina, the feedstock used to make aluminium, is a prime example of what’s happening, with Russian exports being cut off as US sanctions bite over the use of chemical weapons in Syria, which means WA’s alumina exports are attracting sharply higher prices.

Nickel, another WA specialty, could be next, with giant Russian producer Norilsk tipped to be a future target of sanctions.

Other raw materials exported from WA could also benefit if Russia becomes a country too hot for banks and commodity traders to handle, with wheat, natural gas, diamonds and gold on the list of common products.

There’s a long way to go before sanctions hurt most of those Russian exports, but what’s just happened with aluminium is an eye-opener because of the way pressure on a single commodity has collapsed the value of the Russian currency and caused panic in global markets.

Described as an ‘aluminium-tipped precision strike’ the US ban on doing business with Rusal, Russia’s biggest aluminium and alumina producer, was actually aimed at a single man, Oleg Deripaska, the major shareholder in Rusal.

The knock-on effects of making it illegal for US companies and banks to do business with Mr Deripaska and his business interests have been profound, even washing up as far as Ireland, Switzerland and Australia.

In Ireland, the Aughinish alumina refinery operated by Rusal is facing closure, while Australia’s second biggest mining company, Rio Tinto, is caught in the sanctions trap because it supplies bauxite to the refinery.

In Switzerland, another big miner and commodity trader, Glencore, is being forced to change its business model or risk being banned by the US Treasury Department from having access to US credit markets or doing business in US dollars – the currency in which most of the world’s commodities are traded.

The effect of blacklisting Rusal is measurable on a number of markets.

On the currency market, the rouble fell by 7 per cent against the US dollar. On the London stock exchange Rusal’s parent company, EN+, fell 55 per cent.

A reverse effect is under way on the Australian stock market with Melbourne-based Alumina, the part-owner of three alumina refineries in WA, hitting a 12-month share price high of $2.66, an increase of 58 per cent in the past year; and while much of that rise can be attributed to cut-backs in Chinese alumina production, the Russian sanctions are starting to have an effect.

Alumina the raw material has risen to its highest price in eight years, up 53 per cent over the past two months to $US469 a tonne, a rise that is flowing directly into the profits of WA’s alumina producers, including South32, which operates the Worsley refinery near Collie.

Whether the higher price for alumina can be maintained is one question flowing off an unstable situation. Which commodity could be next to benefit is another question, with the obvious candidate being nickel, for two reasons.

Firstly, Norilsk is a company controlled by another Russian classified as an oligarch, Vladimir Potanin, once a close associate of Mr Deripaska, and also on a list released earlier this year by the US Treasury of businessmen and politicians with close ties to the Russian government.

Secondly, nickel is mainly used to make stainless steel, with steel and aluminium at the top of the US government’s drive to protect its local producers of those two metals through increased tariffs aimed at making imports more expensive.

With the spectacular success of the attack on Mr Deripaska and Rusal and the way it has weakened the Russian economy, it would be an easy move for the US government to do the same to Mr Potanin and Norilsk.

A whiff of something brewing in the nickel market can be seen in the price of the metal, which has risen by 10 per cent during the past few weeks to be near a three-year high of $US6.30 a pound.

Local nickel miners are also showing signs of a revival after a few bleak years.

Mincor Resources, which was forced to mothball its mines near Kambalda two years ago, is up 10 per cent over the past two weeks to 38 cents. Independence Group is up 9 per cent to $5.

The recent increase in the oil price is another plus for WA, because exports of natural gas are priced using oil as a marker.

In recent weeks, oil has risen to a four-year high of $US72 a barrel, and is tipped to hit $US80/bbl later this year thanks to a combination of production cutbacks by major oil-producing countries and uncertainty about future events in the Middle East.

For WA’s gas exporters, led by Woodside Petroleum, the rising price of oil is extremely good news because it forms the basis of long-term gas sales contracts, while the expansion of gas producing projects becomes more appealing as the oil price ticks higher.

With US government pressure on Russia more likely to increase than decrease, banks and commodity traders are extremely wary of doing any business with Russia, especially in US dollars.

Eins, zwei und drei

The rationale behind Wesfarmers’ proposal to spin-off its Coles supermarket business is becoming a little clearer every day. Competition continues to heat up in the retailing sector, and the planned entry of another big German food discounter is viewed as the icing on the exit cake.

Kaufland, owned by the Schwarz group, is expected to move into the Australian market late next year, joining its sister company, Lidl, which arrived two years ago, and arch rival, Aldi, which opened five years ago.

Already a highly competitive business, margins on food retailing are likely to be further compressed by Kaufland, which has a similar model to Coles and Woolworths based on very big shops. Aldi and Lidl, on the other hand, specialise in small shops carrying a limited range of goods.

News that Kaufland is coming caused analysts at the investment bank Morgan Stanley to warn that a shake-up of the food-retailing sector was only just beginning.

“The Australian supermarket industry is ripe for further discounter disruption as Kaufland enters soon,” the bank said in a research report.

“Very high labour costs, high store rentals, low competitive intensity and high existing margin structure all enable another discounter in Australia.”