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Rusal: Helter smelter

The smelters sit idle by the Volga. Rusal keeps on cutting aluminium production - down another 6 per cent in the third quarter. So it should: the bendy metal's price is in a fug, Rusal's year-to-date net losses are more than $600m, and its share price has been cut in half during that time. The industry, not only Rusal, needs to cut production. The trickier problem for shareholders, however, is inventory.

Much western aluminium supply has ended up in warehouses, where it can be tied up in financial trading. The London Metals Exchange is on a crusade against hoarding. If its penalties work as planned, lots of metal will hit the market, pushing spot prices down into line with futures, and reducing the premiums over LME prices that producers can fetch for fast delivery. That should curtail supply, and fast.

But what if the LME cannot solve hoarding with a rule-change? Hoarders could switch to warehouses outside the LME system. Such "dark" inventory is harder for the market to distinguish from actual consumption, so aluminium futures might rise - making it attractive it to finance yet more storage. Rusal cannot solve this problem on its own, any more than it can shame other producers into faster capacity reduction (though it has tried). A real fix starts with higher interest rates, which would raise storage costs, and transparency in "off-exchange" deals.

A healthier market would not be all good for Rusal, at least initially. Consider Rusal's own premium: a whopping $269/tonne, on average, to date this year. Investors cannot be sure whether this reflects LME bottlenecks, dark inventory, or the stabilizing real demand that Rusal is forecasting. All they can say for sure is that sooner or later all the excess metal clogging the market will have to clear. That means only one thing for prices. Still along for the ride?

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