Rusal gets ready for a shave

PUBLISHED : Tuesday, 15 May, 2012, 12:00am
UPDATED : Thursday, 07 May, 2015, 4:50pm


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Rusal, the world's largest producer of aluminium, may cut its smelting capacity by up to 15 per cent to adjust to industry overcapacity. But an analyst says restoring demand and supply equilibrium in the industry may take up to two years.

In its first-quarter results statement yesterday, the Moscow-based firm said it was considering cutting its 4.1 million tonne annual smelting capacity by 300,000 to 600,000 tonnes starting in the second half of this year. It may also idle a corresponding amount of alumina - or aluminium oxide - capacity.

In the industry's supply chain, roughly two tonnes of bauxite make one tonne of alumina, and two tonnes of alumina make one tonne of aluminium.

The overcapacity weighed on Rusal's results and it yesterday posted an 83.6 per cent year-on-year drop in first-quarter net profit, to US$74 million. Stripping out one-off items, recurring net profit tumbled 69.4 per cent year on year to US$112 million.

Revenues fell 3.7 per cent year on year to US$2.88 billion, as an 11.8 per cent decline in the average aluminium selling price and a 19.2 per cent drop in the alumina selling price more than offset a 12.8 per cent rise in aluminium and alloys sales volume.

Its operating profit margin, adjusted for non-recurring items, plummeted to 8.2 per cent from 22.8 per cent, as flat smelting cost could not make up for lower product prices.

Despite the dismal profit performance, Rusal chief executive Oleg Deripaska painted a brighter outlook for the year's second half.

'Rusal envisages both the fundamental demand for aluminium [and] aluminium prices will strengthen as a result of continuing global economic expansion in China and the United States, [and] continued cutbacks in global aluminium production.'

Some analysts do not share the optimism.

'The aluminium market will remain weak in the next two years, mainly because we expect oversupply to remain,' said Paul Cliff, an analyst at London-based ING. 'I don't expect a significant rebound in this year's second half, and I expect the industry will take two years to rebalance demand and supply.'

Cliff said global oversupply would remain because China, instead of shutting down unprofitable capacity for good, was expected to merely shift high-cost capacity from the eastern regions to western regions rich in cheap energy. Electricity accounts for about 40 per cent of smelting costs.

ING forecasts that the aluminium price will average US$2,205 per tonne this year, rising to US$2,425 next year. The benchmark London Metals Exchange three-month forward contract has fallen 13 per cent since the start of March and averages US$2,179 a tonne so far this year.

While the aluminium price may be higher next year, Cliff noted that Rusal's production costs would also be higher.

In a report earlier this month, analysts from Russian brokerage Troika Dialog forecast first-half operating profit of US$500 million, or one-quarter of brokerage analysts' average full-year estimate.

Rusal's share price dropped 1.4 per cent to HK$4.96 in Hong Kong yesterday, compared to a 1.1 per cent fall in the Hang Seng Index.