• The recent announcement by the US Treasury Department to impose sanction on aluminium from Russian entities and individuals last Friday has caused primary aluminium prices to surge more than 9% amid the fear of global aluminium supply shortage. The prominent targets of the US Treasury Department include Rusal PLC and seven other firms (i.e. EN+ Group) linked to Oleg Deripaska (a close associate of President Vladimir Putin who allegedly attempted to undermine Western democracies). Rusal PLC is the second largest aluminum exporter to the US and the biggest non-Chinese producer in the world (Exhibit 1), accounting for 7% of global aluminium production (~3.7mil MT per annum) while producing 11.5mil of alumina per annum (~7% of global alumina production).

• Banks and lawyers have been advising global aluminium traders to stop buying aluminium from Rusal PLC following the US Treasury Department’s announcement. According to the department, the sanction implies that: 1) US citizens are generally prohibited from dealings with the sanctioned entities; and 2) non-US persons could face sanction for knowingly facilitating significant transactions for or on behalf of the individuals or entities blocked. This may result in traders and consumer halting their purchases of aluminium from the sanctioned entities like Rusal PLC.

• Some commodity experts reckon that the proposed sanction on Russia (including related entities & individuals) may face a similar fate like the previous sanction on Iran where some 1 million barrels per day (bpd) of crude oil supplies were cut off from the global market. We believe a similar situation will re-occur if the proposed sanction takes effect, cutting off the supply of 3.7mil tonnes of aluminium and 11.5mil tonnes of alumina from the global market which could lead to a global aluminium supply shortage.

• The fear of Rusal PLC’s production to be “shed off” from the global market has also pushed aluminium prices to touch an all-time high in April 2018 (due to panic buying) after the recent plunge for the past 7 weeks. To recall, the aluminium prices have been trending downwards due to the prior announcement by the US government to impose hefty tariffs on imported aluminum (10%).

• On the other hand, the share price movement of Press Metal has been trending in accordance to the global aluminium price (Exhibit 2). We expect Press Metal’s share price to swing in tandem with the global aluminium price. As for now, we believe it is premature to conclude these two measures by the Trump administration which are: 1) to impose 10% tariff on imported aluminium; and 2) to impose sanction on Russiarelated entities and individuals are a done deal. As such we maintain our aluminium ASP assumptions at US$2,150/tonne in 2018. We maintain our OVERWEIGHT rating on the Building Material sector, with a HOLD call on Press Metal (FV: RM3.23).

Source: AmInvest Research - 10 Apr 2018