The share prices of the big miners are under pressure today but Rio Tinto Limited (ASX: RIO) could be particularly vulnerable as Credit Suisse warns that the recent sharp rise in aluminium prices is about to be undone.
The US government's sanctions against Russian aluminium giant Rusal had caused prices in the metal to spike and trigger a rally in aluminium-exposed miners on the ASX like Rio Tinto, South32 Ltd (ASX: S32) and Alumina Limited (AWC).
These stocks have gained between 9% and 15% over the past three months alone compared to the 2.5% increase on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Their outperformance isn't surprising. The move by US President Donald Trump prompted many analysts including those at Credit Suisse to upgrade their price forecasts for the commodity over the past two months, but Credit Suisse has now done an about face as the broker is unsure if unpredictable Trump will change his stance.
After all, we seem to be going through an era where traditional enemies of the US have warmer relations with the world's biggest economy than its traditional allies like Europe and Canada!
"There remains extreme uncertainty over aluminium as it depends on the US regulatory policy, which is difficult to foresee," said Credit Suisse.
"Nevertheless, we now believe Russian aluminium supply will be maintained. If this is correct, then by next year, the aluminium sector could revert back to its previous status of being oversupplied by China's smelting sector."
Chinese smelters reported net exports of 3.7 million tonnes of surplus semi-fabricated product in 2017 and Credit Suisse believes the oversupply will persist into 2019.
But US aluminium users won't get much reprieve. While Trump may appear to be willing to move away from the Rusal sanction, he has slapped a 10% import tariff on aluminium from countries like Canada. This means the price of aluminium in the US will likely remain artificially high for the foreseeable future.
This is not good news for Rio Tinto and South32 as their smelters are outside of the US, but it will be interesting to see if Alumina is hit given its joint venture with US aluminium producer Alcoa Corporation and the fact that Australia (where the JV's mines and smelters are) has largely escaped Trump's tantrum tariffs – at least so far.
This isn't time to panic though. I believe Rio Tinto and South32's diversified operations and the positive outlook for commodities should afford protection to these stocks, although they could underperform their peers like BHP Billiton Limited (ASX: BHP).
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