Tag Archives: Rusal

RUSAL joins CNIA

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UC Rusal has become a member of the China Nonferrous Industry Association (CNIA), according to a press release today.

It had previously been reported that Rusal’s president Oleg Deripasky had been in Beijing last week for a meeting with the CNIA. But this move was not mentioned in those stories. The press release gives virtually no details of how Rusal met membership criteria, since Rusal owns no smelting assets inside China (plenty across the border of course.)

It’s an unusual move, and I went so far as to describe it as “hopeful” to the Reuters Metal Bulletin reporter who rang me for comment.

CNIA is a government entity. Industry associations in China do not operate in the way we are used to in other countries. Although the CNIA supports industry initiatives, its primary role is the roll-out and execution of government policy. It may seem a little bit of an overkill to set up an industry association for an industry with fewer than 70 entities (which together own about 130 smelters.) But think in terms of steel, where there are thousands of proprietors, and you begin to understand why the government makes use of industry associations. It is also a throwback to the 1990s, when the aluminium industry was entirely government-owned.

To understand the work of the CNIA, recall who it was that led the closure of all China’s Soderberg lines in 2004 and 2005.

Since Rusal has no assets in China (they own 2 cathode plants and a JV with a metals trader), it is hard to understand how they qualified.

And if Rusal expects a “leg up” in promoting sales of metal from their plants into China via the CNIA, it seems a long stretch, from what I can see. In the first place, we have local and provincial governments propping up the industry, keeping smelters open and even funding the re-start of additional capacity, all of which keeps China over-supplied. Second, the last major Sino-Russian deal was the crude oil pipeline, where China has short-changed Russia to the point that the Russian President came to Beijing to complain. Third, it has been a long time since the Chinese took advice from any foreigners, much less the Russians.

To the best of my knowledge, no other foreign companies are members of the CNIA. Alcan may have been, for the short while that they owned their Ningxia plant. Alcoa had a small interest in the Chalco Ping Guo plant some years ago, and now have their strategic alliance with CPIC, but I never hear Alcoa talking about being a member.

But to turn this thing full circle, CNIA is a member of the IAI (IAI’s China production figures come from the CNIA), so Rusal may now be an IAI member twice!

Editor’s note - It was Metal Bulletin who called me, not Reuters.

 

All shiny metals look alike…

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BHP Billiton has announced that it will merge its aluminium division with its stainless steel materials division, to form a new larger entity within the group.

According to the BHPB website, “… individually, Aluminium and Nickel are small divisions relative to the other businesses in BHP Billiton. The combination of these into a single business unit will provide appropriate scale within the BHP Billiton portfolio, as well as simplifying the functional structure of the business to assist in our efforts to make it a more efficient and competitive organisation.”

In some senses this is a backward move for the aluminium assets. Smelters in Mozambique and South Africa now have to compete with nickel projects for capital, even before the RFA gets past the division heads and on to the corporate board of directors. And two small divisions being merged still don’t make for a big enough voice, compared to the heavy weights in the BHPB portfolio.

It’s part of a general long-term shift in the aluminium industry. We will be talking more about this in our upcoming “Cash Cost Curve” Report (due out very soon), but if you look at who were the big players in aluminium at the turn of this century, you would find (surprise, surprise) aluminium companies. Alcoa, Rusal, Pechiney, Comalco, Chalco - all these companies were focused only on aluminium. So when the boards of directors were planning capital strategies, it was about how to maximise shareholder returns in aluminium.

Now we have Resources companies like Rio Tinto and BHPB controlling portions of the industry, and aluminium companies like Chalco now branching away from the light metal. Chalco is now active in coal, copper, and rare earths. Rio Tinto assesses its aluminium interests in the light of its iron ore and coal and other materials, as does BHPB, and with the poor returns on aluminium in the 12 years since the turn of the century, it’s no surprise that these boards relegate aluminium into a second tier of assets.

Of the heavyweights, only Alcoa and to a lesser extent Hindalco/Novelis have made diversification decisions within the industry, and stayed true to their original purpose.

Watch for more on our CCC report very soon.

 

Rusal signs LTA for green coke

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Further to our post about Rusal stopping the purchase of green coke from China (see here), a press release has now come out, with more details about their future plans.

Rusal has signed a 5-year agreement with Gazprom NEFT, the Russian natural gas and oil conglomerate. Under the agreement, which came into force at the start of this year, the coke will be supplied from the Omsk Refinery, the largest of Gazprom Neft’s refining assets. Under the contract, RUSAL will receive up to one million tonnes of petroleum coke over the life of the contract.

According to the press release, Gazprom Neft plans to upgrade the Omsk Refinery’s coke production facilities. The company is considering options to improve coke production efficiency of the existing coke plant and build new production units.

The press release did not mention pricing formulas, nor did it talk about any plans to add calcining capacity.

Rusal to stop buying GPC from China

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Unconfirmed reports are coming through that UC Rusal is to cease buying green petroleum coke from China. No details yet, so the rest of this post is speculation. And we speculate that perhaps they are planning to switch to buying more calcined coke and anodes. Rusal already buys some CPC from China, and owns two cathode plants here as well.

If this is true, it would be part of a general trend in the aluminium industry to re-think coke strategy. Following the efforts of Alcoa to establish a JV in a calciner in 2009, there have been several other companies seeking to do something a little different here in China. Late last year, Mubadala signed a JV agreement with ZCGG, who in turn have a partnership with Mitsubishi. Vedanta has been active in the China market, even to the point of telling Weifang Lianxing that they would be a long-term buyer of CPC from that company. Other Chinese companies are being courted by or have already joined with foreign partners for brownfield and even greenfield projects.

All this activity suggests that these aluminium companies are taking the same view as we do here at AZ China - that China is likely to continue to grow in importance as a supplier of coke to the smelter industry. As the companies rush (at snail’s pace in some cases) to join with Chinese partners, those who come to the “feasting table” last may find that there’s nowhere for them to sit and no more coke share to go around. Those not already in a long-term strong relationship with Chinese suppliers are likely to find themselves locked into either the traditional suppliers in the USA, India, or perhaps hang out for additional capacity in the Middle East. Not that calcining or anode producing capacity is ever the key issue - supply of anode quality green coke is. (With an additional wish list of qualities such as reliability, consistency, stable pricing and trust in one’s partners.)

Big punt

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The world’s business press has been running stories about the announcement Thursday that Rio Tinto will go ahead and complete the expansion of its Kitimat smelter.

Kitimat, on Canada’s west coast, was previously a Soderberg plant, but is being completely overhauled, with AP40 technology and extra lines, to take it to 420,000 tonnes when the project is finished.

Some articles in the business press referred to hints that perhaps this will not be the last of the announcements for Kitimat. That would fit in with RTA’s stated strategy of moving down the cost curve by closing high cost smelters but expanding their better performing plants.

But what worries me about the Kitimat announcement is that Rio appears to be punting on China eventually becoming a net importer of the light metal.

Certainly there is a school of thought out there, that the combined effects of high electricity costs, shortages of bauxite and alumina and government policies, will force the Chinese market into a net shortage position. Esteemed companies such as Harbor Aluminum made this very forecast as recently as this week, at the Antaike Zhuhai conference.

But the problem with this bet, apart from the fact that some people are using wrong data to base their predictions, is that it fails to understand the Chinese market, and the Chinese psychology.

China has more than 20 new smelting projects under way right now. That’s in an environment where credit is tight, markets are uncertain and metal price is falling. As recently as 5 years ago, the industry was growing at more than 20% per year, and it is entirely possible that the industry can do the same thing again. That is why the NDRC has been issuing guidelines and directives, not to hobble the industry, but to avoid another over-capacity run again.

Now the Chinese government is showing the first signs of returning to an investment-lad economy, with the PBOC reducing the RRR, so what odds projects that maybe were short of funds may now be dusted off. Remember that most of the new capacity is going into the far northwest, where the local governments are actively promoting new investment.

The Rio punt, if China is what they are punting on, also relies on demand growth maintaining its present rate of knots, especially in comparison to supply. Our analysis shows that, although growth will be solid, it will not match the rates of the last few years.

In any case, plans to punt on China needing to import metal are nothing new. RUSAL has been talking about being a supplier to China for the last 2 years.

If it was my money, I would not be punting on China being anything more than a minor importer. In consumption terms, our forecasts show that any shortage is likely to be no more than 1 - 2 weeks supply, at most. And that’s about the same amount of metal that sits outside the visible inventories.

Contact AZ China if you want more information on China’s Aluminium outlook.

Pacific Aluminium - part 2

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Yesterday I joined a Reuters Base Metals forum, where I was interviewed by Andy Home. We discussed the outlook for 2011 and 2012, in terms of demand, supply, Government intervention and metal price.

The discussion then went to the question of who might buy Pacific Aluminium. Although I said much the same as I had written in my previous post (see here), that conversation prompted me to consider the question further.

A couple of additional thoughts therefore. As to who might buy the company, or at least take a controlling interest if RT goes the IPO route, I suggested to the Reuters forum that perhaps Rusal could be a candidate. Today, I realise that to look for buyers, you need to look outside the usual producers, be they Chinese, Russian or others. Given that the metal is in the Asia Pacific region, one company who might be tempted, cashed up as they are, is Glencore. Taking all those metal units will give them control of premiums and a lucrative market in Japan and elsewhere. So it isn’t just a question of the value of the assets. Perhaps the real question is the value of the metal units.

Another question is, will RT sell the new company in one job lot, or will they be forced to sell individual pieces? This is a difficult call, because finding a buyer who can stump up the billions might take more time than selling each plant separately. But the problem is the alumina supply. Without Gove as part of the company, the smelters would be stranded for their alumina. As soon as you unhitch Gove from the downstream smelters, those smelters lose value quickly.

Finally, one reader wrote to me with a couple of comments which I thought were very good. He picked up on my comment about selling the assets. He pointed out that RT bought the assets at the top of the market, and now propose to sell them when the world is edging closer to another financial precipice and metal prices are down to $2100. He wondered how the RT MD can keep his job, buying high and selling low.

Second, he disagreed that it’s a good thing for Rio to get back to digging things out of the ground. With 80% of their earnings coming from iron ore, the divestment of aluminium increases their dependency, or the risk factor for RT’s shareholders.

I am delighted to get his comments, but if you would like to make a comment on anything in the blog, please go to “leave a reply” at the bottom of the screen.

 

Guess who part 2

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Back in November, we brought you this post, asking you to guess which major aluminium company was looking to build smelters in China.

Now, finally, almost 3 months later, Alcoa finally announces that they are talking to China Power Investment Corporation.

According to our sources, the discussions were with Shenhua Coal, one of China’s largest coal companies. Perhaps our source was wrong - CPI is definitely a major energy company, with aggressive plans for their aluminium business.

There are some things that worry your humble blogger about this announcement. First, there is no mention in the announcement of Alcoa’s involvement in Henan and Qinghai provinces, despite our sources naming these two provinces as being the centres of Alcoa’s interests.

Second, why Alcoa? CPI already has the smelting technology, and is already well experienced at building new smelters. It is currently building a new smelter in Inner Mongolia, with 350kt capacity. It already owns Qingtongxia smelter, until recently the biggest smelter in China. Heck, that smelter was part-owned by Alcan until 2007, so there may still be some Pechiney technology lying around inside the smelter.

CPI is an energy company first, and its aluminium business is still relatively small compared to say its nuclear power business. It doesn’t need the capital, that’s for sure.

Alcoa has a history of some involvement with Chalco in China, and CPI are competitors to Chalco, so another question mark as to why CPI chose Alcoa.

I have read some press saying that perhaps CPI wants access to clean energy technology. But it already has that too, thanks to its huge investments in wind and solar energy.

I suspect the real reason is because CPI was chosen to be the vehicle with which to do business with a foreign company. It is not uncommon for these decisions to be made at a political or bureaucratic level, then passed down to the board.

If CPI made the decision themselves, without guidance from Beijing, then probably they were left with little choice. Rio Tinto Alcan is already heavily tied up with Chalco. UC Rusal would make an interesting partner, since they are just across the border in Russia, but Rusal is pursuing its own plans for supplying China’s future aluminium demand. BHP Billiton is not big enough in aluminium to be interesting. Perhaps Hydro Norway, but Hydro may have been considered too much of a competitor, given that Hydro is also an energy company.

My third concern is, why CPI, from Alcoa’s point of view? Surely Alcoa knows of the problems and pitfalls of Alcan’s experience with them in Qingtongxia, although to be fair, at that time the smelter JV partner was the provincial government, not the energy company. But why did Alcoa not choose someone like Xinfa, or Xinren, two of the more enterprising aluminium corporations in China.

After all, CPI is an SOE - a State Owned Enterprise. SOEs are growing in importance and power, but they tend to be inefficient and although they have plenty of capital, they answer finally to politicians, not to the board.

One thing about this announcement - predictions that China will be a net importer of millions of tonnes of raw aluminium by 2015 will prove to be wrong. It will also cause Rusal to sit up and take notice. An Alcoa smelter or two inside China is going to be a tough challenger to their plans to position themselves as a major supplier to China.

No doubt Chalco is also closely reviewing their strategy as a result of this announcement.

On again, off again

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No sooner did the announcement come out, than the denial was quickly issued.

Gujarat Foils Ltd, in India, yesterday announced that Rusal had agreed to invest R14,000 crore (1 crore is 10 million Rupees, so this investment has a price tag of about US$3 billion) in a new aluminium complex in its home province.

The complex was said to include a 1 million tonne refinery and 500,000 tonne smelter. Gujarat province is on the far west of India, next door to Pakistan.

The ink on the announcement was barely dry (that’s an expression that will surely die over the ages) when Rusal issued a press release denying the announcement. According to the press release, Rusal “rejects the statement made by Gujarat Foils Limited regarding RUSAL’s participation in the Kutch alumina project. RUSAL has not held any negotiations with Gujarat Foils Limited and has not entered into any agreement with the Indian company.”

That’s an end to it. Or is it? The Gujarat announcement came from Gujarat Foils, but the broker for the deal is said to be Gujarat Mineral Development Corporation. It leads me to speculate, and I reiterate it is only speculation, that while Rusal may not have had discussions with Gujarat Foil, it may have done so with GMDC. The Rusal press release is quite abrupt, but doesn’t mention the overseeing company. Perhaps Gujarat Foil has embarrassed the Russians by prematurely announcing their involvement before Rusal had had a chance to tell stakeholders, bankers and other key people on the Russian side.

Time will tell. But certainly the Russians were very quick getting their press release out.

Optimistic?

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A report in some newspapers quotes UC Rusal as predicting a 22% increase in Russian domestic aluminium consumption in 2011.

The expected growth will come from construction, secondary industry and the packaging sector, according to the reports.

With 22% growth, Russia would probably become the world’s fastest growing sector for 2011. We forecast that even China and India will not get anywhere near that growth rate. A little optimistic perhaps.

Interestingly, the report also says that Russia’s exports of aluminium in 2011 will drop by 100,000 tonnes to 150,000t. It is hard to reconcile that forecast with other statements from Rusal that they expect to sell increasing volumes to China next year. Are they expecting to be beaten in the race to fill China’s supposed shortage? Or have they pushed back their forecasts of Chinese capacity squeeze?

I suspect it is more likely the latter than the former. According to our analysis, China will continue to import scrap, but will not need prime metal for the next few years.

I’ll have what he’s smoking…

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This headline caught my eye the other day.

China’s aluminum output to rise 30 pct in 2010 - UC RUSAL

What a load of poppycock, I thought. Then I read the next line of the story, which appeared in Interfax. It said that output would grow to 16.9 million tonnes in 2010. That I can believe, sort of. We at AZ China estimate that 2010 will see around 16.5 million tonnes. Since at the start of the year we thought it would be around 17.5 million tonnes, we are at least in the same ball park.

But that is not a 30% increase. The problem with using a percentage as the indicator is that the denominator is wrong. The CNIA published 12.9 million tonnes as the figure for 2009, but they conveniently left out about 1.2 million tonnes. This was metal produced at smelters who are not aligned with CNIA for various reasons, such as for the reason that they are not legal, of because they are refusing to kowtow to the associations rules.

Our own research, which involved checking all 120-plus smelters in China, showed that the true production figure for 2009 was 14.2 million tonnes. The equation for alumina production, imports and consumption supports this. So do some of the big alumina producers, with whom we checked for their private research results. And when you look at the detailed list from CNIA, as we were able to, you find that they reported production out of less than 90 of the smelters in China.

What are the implications? Reporting a lower production number takes off some of the heat from the Government. Taking a stoic position in the light of rebelliousness from some smelters is a typical Chinese reaction. Act as if the rebels don’t exist.

But I am more interested in why Rusal wants to suggest a 30% increase in the first place. This is the same company that is clearly positioning itself as the future supplier of metal to China. It is the same company that predicts that China will be short of capacity in the next couple of years (which flies in the face of the 10 million tonnes of brownfield and greenfield additions happening right now).

Perhaps the official who made this prediction hasn’t read Oleg’s opinion piece.