Rusal listing will be no triumph for HK market
On the face of it, the decision by Rusal, Russia's largest aluminium producer, to opt for a listing in Hong Kong rather than London would appear to be a triumph of successful lobbying for Hong Kong Exchanges and Clearing.
The exchange has worked hard in recent years to attract listings by companies from Russia and Central Asia, presenting the city's capital market as an up-and-coming alternative to the established centres of London and New York.
A projected US$3 billion offering by Rusal valuing the company at US$30 billion would be HKEx's first big catch. And if yesterday's reports prove correct, and the proposed stock issue is supported by a sizeable investment from Aluminum Corp of China (Chalco), no doubt both the exchange and the Hong Kong government will portray the deal as a crucial vote of confidence in Hong Kong's future as a major international financial centre by a leading corporation in an important growth industry.
In reality, however, Rusal is a desperately indebted company battling to survive in a deeply depressed industry which is unlikely to show any significant signs of recovery for another two to three years.
Its decision to list in Hong Kong is hardly a triumph for the city. With Rusal's chief executive and majority shareholder Oleg Deripaska the subject of a multibillion-dollar lawsuit filed in the British courts by a former business associate, a London listing was not exactly a compelling option.
And after Deripaska was last year refused an entry visa by the US authorities because of suspected links to organised crime, New York looked problematic, too.
In contrast, Hong Kong appears doubly attractive. For one thing, valuations in Hong Kong are a great deal more favourable to Rusal as an issuer. With the Hong Kong shares of Chinese aluminium giant Chalco currently trading at about twice the valuation of New York-listed producer Alcoa, Deripaska will be hoping he can raise significantly more through a listing in Hong Kong than he would be able to get elsewhere. And with close to US$17 billion in debt to service, Rusal needs all the proceeds it can get simply to stay afloat.
And secondly, Deripaska might well reason that political considerations will ensure Hong Kong's regulators do not attempt to police Rusal's governance too rigorously for his comfort.
So for Rusal, a Hong Kong listing is a no-brainer. Even so, an offering in the city may not proceed as smoothly as Deripaska hopes. Before the proposed issue can go ahead, Rusal will have to clinch an agreement with 73 international banks to restructure the US$7.4 billion in debt it owes them. At the same time, it will need to soothe over its domestic creditor banks, one of which recently attempted to force two Rusal subsidiaries into bankruptcy in an attempt to recover its loans.
Even then, the company is likely to face difficulty drumming up investor interest. Despite talk of a new commodities boom propelled by Chinese demand, the aluminium industry remains a deeply troubled business. Following massive investment, China has doubled its aluminium production capacity in recent years, leaving the world with a massive overhang of excess capacity.
As a result, the aluminium price has failed to rally in line with the prices of other metals such as copper following last year's collapse (see the first chart below). Meanwhile, the tonnage of aluminium held in stockpiles by the world's metal exchanges has soared (see the second chart), keeping a lid on prices.
Altogether, the global industry is labouring under overcapacity estimated at 20 per cent. And with massive new smelters due to be completed in China over the next five years, the problem is unlikely to be solved even with economic recovery. Analysts warn the aluminium price could remain below US$2,000 a tonne for the next couple of years, leaving producers struggling to turn a profit.
That spells bad news for debt-laden Rusal and leaves Hong Kong's victory in attracting the company's listing looking distinctly hollow.
