Русский язык English language Deutsch Français El idioma español 中文
Home page  / News & Analysis  / Latest news  / UC RUSAL's Chinese mistake
Select: Русский язык English language Deutsch Français El idioma español

UC RUSAL's Chinese mistake

UC RUSAL's Chinese mistake

07.02.2012 — Analysis

UC RUSAL's general director, Oleg Deripaska, has announced a reduction in the manufacture of primary aluminum. The company intends to close some of its production plants in Russia. It is likely that electrolytic production at Bogoslov Aluminum Plant (BAP) will be shut down, as the equipment there is quite outdated. Experts believe that economic considerations kept the owners from including that plant in their modernization plans. As this columnist for RusBusinessNews has determined, BAP became the victim of Derpaska's strategy - in the mid-2000s, Mr. Deripaska decided not to expand the manufacture of high-value-added aluminum products.

The reason for the cutback was the surplus of aluminum, which led to a sharp price drop at the end of 2011 ($2,170 per ton). A 9% increase in aluminum production prompted leading global companies such as Rio Tinto Alcan, Alcoa, and Norsk Hydro to announce the shutdown of their facilities that could not operate efficiently at that price. UC RUSAL followed their example. The Russian company's unusually high burden of debt also helped to force its hand. Last summer the state-run Vneshekonombank agreed to lend UC RUSAL 40 billion rubles to complete the construction of the Taishet aluminum smelter in Siberia, a facility with a 750-ton capacity. In order to service its many debts, the company took out a $4.75 million syndicated loan in the fall of 2011.

The falling price of primary aluminum forced Mr. Deripaska to begin negotiating a lower interest rate on his loans. He was able to work out a 12-month debt covenant, which is in reality an extension of the term of the loan. Experts believe that these agreements will allow UC RUSAL to easily shut down some of its facilities, which will lead to an increase in the price of aluminum.

In an interview with Bloomberg Television, Oleg Deripaska claimed that he would close some of his plants within 18 months. He might reduce production as much as 6%, or by approximately 250,000 tons of aluminum. Experts predicted that the first plant to be shut down will be the Bogoslov Aluminum Plant, which produces about 200,000 tons of aluminum a year using outdated and expensive electrolytic cells. But the total of one million tons per year that the Taishet and Boguchansk plants can produce will more than make up for the loss of the Bogoslov smelter.

But UC RUSAL's press office is in no hurry to announce which candidates might get the ax. The PR representative for the Urals Federal District, Roman Lukichyov, told RusBusinessNews that no final decision had yet been made. He emphasized, "The company has no plans to shut down any one factory in particular. The planned decrease in production may affect the older, less profitable, and less environmentally responsible facilities. But in any event, electrolytic production at BAP would not be affected. As was stated earlier, there are plans to modernize that facility, and a feasibility study of that project is currently being developed".

However, in an interview with Interfax, the company's first deputy general director, Vladislav Solovyov, claimed that the only way to rescue aluminum production at BAP would be to buy the Bogoslov thermal power station at a reasonable price from IES Holding, CJSC. Nikolai Kulyushin, the director of IES Holding's department of strategic communications, told RusBusinessNews that the thermal power station would be sold along with the obligations and rights for the construction of a new power station, since the equipment at the Bogoslov power plant is quite worn out.

The seller estimated the value of the thermal power station at 3.5 billion rubles, including the fee for a contract to provide power for the construction of a new thermal power station. But UC RUSAL was not satisfied with that sum. According to Vladislav Solovyov, the company is only willing to compensate IES Holding for the expenses of buying and servicing the thermal power station. The construction of a new thermal power station is not part of the discussion. Roman Lukichyov reported that the "right to build the Novobogoslov thermal power station belongs to IES Holding, and hence it is they who should answer those questions".

The dispute over paying for a contract to provide power suggests that UC RUSAL is not positive it will need new power plants in the future. The company is purchasing this "ramshackle" plant merely to reduce the cost of its electricity, thus allowing BAP to operate cost-effectively until 2013, when the Taishet smelter will open with its lower production costs, thanks to cheap electricity from hydroelectric plants in Siberia. At that point, electrolytic production at the Bogoslov plant will probably be shut down. All the talk about modernizing the company is only to reassure the public during the presidential campaigns. It is no accident that several different dates have been announced for BAP's renovation. The government of the Sverdlovsk region expects this to begin in late February, but UC RUSAL's press office is claiming early April.

Kirill Chuiko, an analyst at UBS Bank, believes that UC RUSAL is not actually reducing its production of aluminum, but is simply replacing the expensive facilities in the Urals with more modern and competitive plants in Siberia. The company is being forced in this direction by China, which is closing down its outdated equipment and facilities en masse. This is precisely why Bogoslov Aluminum Plant seems doomed. It is not economically feasible to produce primary aluminum there, and it is risky to try to convert the plant to produce high-value-added products, because the market is already mature, and it would be extremely difficult for a new factory to find its niche.

In reality, BAP was a victim of Oleg Deripaska's strategy. In 2005, Mr. Deripaska decided to focus on the production of alumina and primary aluminum, instead of developing high-value-added products. Accordingly, he sold off all of his non-core assets (processing facilities). The primary owner of UC RUSAL explained this step by citing the lack of qualified personnel and the fact that the old Soviet factories he acquired during the privatization process were so uncompetitive.

Meanwhile, Alcoa Inc. bought two aluminum plants from Oleg Deripaska in Samara and Belaya Kalitva (in the Rostov region) and invested about $500 million in their renovation. The money was spent to improve the production equipment for aluminum semi-finished products, which Alcoa decided to sell on the Russian and international markets. The foreign company was not dissuaded by the poor reputation of Russian industry, nor by the difficult market. They focused on the fact that Russian companies have been slow to produce high-value-added products. According to Helmut Wieser, the executive vice president of Alcoa, UC RUSAL sold its plants at a time when Russia is importing nearly half of its sheet metal for the production of aluminum cans.

Oleg Deripaska's fears about finding enough qualified staff at the Samara and Belaya Kalitva plants were unfounded. Helmut Wieser claimed in an interview with one publication, "The Russian experts working at Alcoa Russia have more than met our expectations, both professionally and in their approach to innovation".

Alcoa and United Aircraft Corporation (UAC) signed an agreement in 2007 to supply improved materials and to transfer modern production technology for the construction and production of next-generation civil aircraft. And other companies have begun to actively develop the Russian market. In 2008, i.e., three years after Oleg Deripaska sold his processing plants, the British company Rexam built a factory in record time in the Chelyabinsk region for the production of aluminum cans.

In that same year of 2008, UC RUSAL also announced that it was willing to invest two million dollars in new innovations that would expand the use of aluminum and aluminum products. Some of the promising ideas that were considered were improving energy efficiency and transportation safety, as well as several other projects. But three years later, UC RUSAL has made no real progress toward manufacturing innovative products.

Meanwhile, Alcoa signed a memorandum in the summer of 2011 with Rusnano Corporation and Holding IDGC, OJSC regarding the production of next-generation wires and cables with improved conductivity and anti-icing properties. In addition, the Samara plant will apply special coatings to oil and gas pipes used in drilling.

Experts claim that these long-term projects could easily be brought to fruition even at the Bogoslov Aluminum Plant. But UC RUSAL's strategists felt that in the shorter term, China will increase its imports of primary aluminum, and thus all their efforts and resources have been focused on modernizing and constructing new facilities to produce low-value-added products in Siberia, which is near the border with the Middle Kingdom. The workers at BAP will have to pay for Oleg Deripaska's commitment to an economy based on raw materials, and many of them will soon lose their jobs.

Officials in the Sverdlovsk region are not about to comment on the statement made by UC RUSAL's primary owner about closing down unprofitable factories. Ilya Maltsev, the press secretary for the Ministry of Industry and Science, advised waiting until March 5, when UC RUSAL will present its vision for the future development of the aluminum industry in the Urals at the presidium of the regional government. The government will react to the company's proposals based on what they hear there. Although it's unlikely that anyone in Russia will be interested in the prospects for the future of the aluminum industry the day after the Russian presidential elections.

Vladimir Terletsky

Regions Project participants Investment projects Consulates and Trade Offices News and Analysis About the Project
«Sum of technologies»®
Web design
Site promotion