(The opinions expressed here are those of the author, a columnist for Reuters.)
* Aluminium and Rusal sanctions: https://tmsnrt.rs/2wOBhsi
LONDON, May 17 (Reuters) - The initial sanctions shockwaves may have passed but the aluminium market is still structurally stressed by the U.S. Treasury's action against Oleg Deripaska and his Rusal aluminium empire.
The price explosion after the original April 6 sanctions announcement went into reverse on April 23, when the U.S. Treasury extended the deadline until October and held out an olive branch to Rusal (but not Deripaska).
After hitting a seven-year high of $2,718 per tonne on April 19 the London Metal Exchange (LME) aluminium price has retreated to a current $2,268.
The market seems to be betting that Deripaska's offer to reduce his stake in and remove himself from Rusal will result in a swift lifting of the sanctions that have roiled the supply chain.
However, the tensions caused by the partial lock-out from the global market of the largest producer outside of China are still evident.
LME time-spreads are contracting again and huge tonnages of stocks are being flipped around against a backdrop of tightening physical markets.
The storm has abated but it may not yet be over.
Graphic on LME aluminium and time-spreads:
SPREADS TIGHTEN, STOCKS ROTATE
LME aluminium time-spreads went super-tight in the days after the original sanctions announcement, the cash-to-three months period <CMAL0-3> flexing out to a $56-per tonne backwardation, a level not seen in many, many years.
It's what happens when around 36 percent of an exchange's registered inventory is placed under sanctions watch. That's the amount of LME-stored aluminium that was categorised as "Eastern European" as of the end of March.
Nervous financiers of off-market Russian stocks also dumped around 150,000 tonnes of metal back into LME warehouses, mostly in the Netherlands, over the following week.
The LME calmed things down with a statement that it would suspend all new deliveries of Rusal-brand aluminium but that metal already in the system before April 6 would still constitute good delivery.
It has since been asked to extend that date in line with the sanctions extension but has declined on the grounds that a normal metal certification chain is very different from a sanctions certification chain.
That leaves one of the biggest suppliers of stocks liquidity to the LME locked out of the exchange delivery system.
It has also served to increase the value of LME-stored metal that comes from anywhere other than Russia.
There were massive cancellations of aluminium stored at the Malaysian port of Port Klang in the week after the initial sanctions hit, 108,725 tonnes moving to the load-out queue in a single day.
All of that metal and more has just been dumped back into the LME system, Thursday morning's stocks report showing "reverse cancellations" of 138,650 tonnes at the same location.
As ever with this particular market, the underlying forces at work are opaque, but the scale of these stock movements points to trading-book stress.
So too does a renewed tightening of the time-spreads.
After moving to a discount to the three-month price last week, the spot price has just moved back to a significant premium again.
The cash-to-three-months time-spread closed Wednesday valued at $21.25 per tonne backwardation with the tightness concentrated on the July-August spread, valued at $35.00 backwardation.
The London aluminium market is no stranger to sporadic time-spread squeezes but this volatility is extreme by recent historical standards.
And dipping into the off-market pool of Rusal metal to deliver against a short position is no longer an easy option.
Finding alternative-brand metal, meanwhile, may be increasingly difficult as the physical market tightens.
Premiums for aluminium in the U.S. Midwest remain elevated on the combination of tariffs and the loss of a major supplier to a market that imported almost 700,000 tonnes last year.
The CME spot contract closed Wednesday at 22.0 cents per pound, equivalent to $485 per tonne.
It's worth remembering that the Rusal turmoil comes on top of two smelter outages, a relatively rare event in the aluminium production sector.
The alumina segment of the supply chain has gone wild because off the double-whammy of sanctions and the partial closure of the giant Alunorte refinery in Brazil.
But Alunorte's loss of production has also caused owner Hydro to close 230,000-tonnes per year of integrated metal capacity at the Albras smelter.
In Canada, meanwhile, a union lock-out at the Becancour smelter is now in its fourth month.
Alcoa, which owns a majority stake in the 438,000-tonne per year plant, said in its first-quarter report that only one out of three potlines has been in operation since Jan. 11.
Albras and Becancour were already disrupting the aluminium supply chain before the U.S. Treasury cast its sanctions spell on Rusal's 3.7 million tonnes of annualised production.
Tightness in the paper market, in other words, is being reinforced by tightness in the physical market.
EYE OF THE STORM?
So far the outright aluminium price is unfazed by the rumblings emanating from the spreads and the mega transfers of stocks.
However, the calm may not last for long.
Research house CRU spells out the two options facing the market, namely lifting U.S. sanctions on Rusal or keeping them in place.
Even if sanctions are lifted, the process could take "several months" and cause a sufficient draw on inventory to lift the price to $2,600-$2,700, CRU argues in a research note published by Fitch Ratings ("Rusal Sanctions Outcome Key to Aluminium Prices", May 15, 2018).
If sanctions stay, they would limit Rusal's ability to sell to countries such as Turkey and South Korea which have experience in navigating oil sanctions on Iran.
Moreover, "supplies of bauxite and alumina to Russia from most of its overseas operations would be halted, drastically curtailing Rusal's primary aluminium output to 2.3 million tonnes in 2019."
Under this scenario the price could peak at $3,000 per tonne this year, CRU argues.
Right now, the market doesn't seem to agree, pricing in an almost immediate lifting of sanctions and ignoring signs of continued disruption to aluminium flows.
If it's wrong, the current period of tranquility will turn out to be the deceptive calm in the eye of the storm. (Editing by Edmund Blair)