Red Sea Supply Woes Make Russian Aluminium Ban Idea Even More Detrimental For EU Economy

The Red Sea military crisis that is already affecting global transportation routes, pushing up delivery times and costs across the production chains could be a classic “black swan” – an unexpected event with severe global implications. It has already caused significant supply chain disruptions for EU producers and, coupled with the looming sanctions against Russian aluminium, it is poised to reshape European industrial dynamics.

The disruption in one of the world’s busiest transportation routes, accounting for about 12 per cent of international container traffic has led to increased transportation times and costs – the alternative route around Africa adds about 10 days to trip duration - and heightened uncertainty in commodity supplies. For Europe, this translates into significant delays and additional import costs for key materials – from oil to aluminium. The nature of this crisis also suggests it may have a protracted impact, necessitating strategic adjustments in supply chain management.

As Europe grapples with the Red Sea logistics crisis and the prospect of sanctions on Russian primary aluminium, the stakes for its economy are high. This convergence of events is poised to reshape the industrial landscape, with implications for inflation, production, and employment. Supply chain complications have already forced the likes of Tesla, Suzuki and Volvo to suspend their European subsidiaries. Logistic disruptions and a rise in container shipping costs are set to affect hundreds of other enterprises, most notably in the retail sectors, with Sweden’s IKEA and United Kingdom’s Next warning of potential delays in goods delivery.

The aluminium market in Europe in particular is showing signs of strain, evidenced by the rising primary aluminium premiums in Rotterdam that have risen by 10-15% since early December after a long period of decline. This increase, a direct response to supply uncertainties and heightened demand, highlights the market's sensitivity. Complicating the issue are ongoing attempts to impose sanctions on Russian aluminium. While repeated calls by EU policymakers and sanctions experts to impose ban on Russian-made primary aluminium as an important source of the country’s export revenue have so far been shelved, they remain on the table as a “last resort” option.

According to ING Think, the new delivery disruptions could not have come at a worse time as the European Union’s aluminium production is currently the lowest this century. While aluminium consumption in the EU jumped 13 per cent since 2000, production capacity in the same period tumbled by two-thirds – from 3 million tons to just under 1 million tons. The main reasons for this spectacular decline were high electricity and labour costs, as well as rising environmental charges.  In addition, growing energy prices after the outbreak of the conflict in Ukraine in early 2022 further squeezing producers’ margins, in particular for energy-sensitive metals like aluminium.

Needless to say, the dual challenges of the Red Sea crisis and potential Russian aluminium sanctions could have a cascading effect on Europe's economy. Rising aluminium costs will contribute to inflation, as industries struggle with increased production expenses. This situation could also lead to a slowdown in industrial activities, impacting employment and economic growth that is already tittering on the brink of recession in the European Union.

The decision to impose further sanctions on Russian aluminium is fraught with complexity. European governments must balance economic risks with geopolitical considerations, in a context where their political capital is already stretched thin and Russia still remains a key supplier of aluminium to the EU market, in particular the high-quality and low-carbon variety needed for eco-supply chains.

Reflecting on the 2018 sanctions on Rusal, we are reminded of the market's volatility in response to geopolitical tensions. The ill-thought-out sanctions led to a global price surge and supply disruptions, with significant impacts on European industries. Today, the possibility of new sanctions on Russian aluminium brings similar concerns to the fore, with hard potential implications for supply stability and cost structures.

In facing these challenges, Europe's path forward demands strategic agility. Policymakers and industry leaders must collaborate to navigate these turbulent times, balancing immediate economic needs with broader geopolitical and sustainability objectives. The coming months will be critical in shaping not just the aluminium market, but the broader economic trajectory of the continent.

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