Rusal seen gaining from rising aluminium prices

PUBLISHED : Saturday, 02 January, 2010, 12:00am
UPDATED : Saturday, 02 January, 2010, 12:00am

Earnings for Russian aluminium giant Rusal are expected to return to profitability this year on the back of rising aluminium prices and increased sales.

Rusal, the world's largest aluminium company, has endured a torrid year after a loss of US$5.9 billion in 2008 while at the same time amassing debts of US$14.7 billion, following the financial crisis which sent aluminium prices plummeting.

However, analysts say the company will return to profitability this year with BOC International forecasting net profit of US$1.04 billion and Liberum Capital estimating US$1.4 billion. Both companies are involved in Rusal's HK$20 billion share placement later this month.

Rusal's earnings are directly related to the price of aluminium with 84 per cent of its revenue in 2008 derived from sales of primary aluminium and alloys.

The company's listing document warns that cash flows are highly sensitive to the price of aluminium and the US dollar-rouble exchange rate. Small changes in key variables could cause the company to default on the restructuring agreements of its huge debt burden.

The aluminium price, which peaked in July 2008 at US$3,122 per tonne, slumped to US$1,300 in March last year but has since moved up to US$2,206.

Although metals and commodities such as copper and nickel soared last year, aluminium has been a laggard.

But the outlook for the aluminium sector is complicated by the oversupply of the metal with London Metal Exchange (LME) stocks at a record 4.5 million tonnes with producers holding 2.2 million tonnes, implying about 65 days of global consumption.

Rusal believes 70 per cent of LME stocks are tied up in trade finance agreements for the next three years and so will not be released on to the market.

At the same time, a large portion of global capacity has been idle since the start of the financial crisis. About 35 per cent of the mainland's capacity is idle, according to Liberum Capital, though it is only economically viable with aluminium prices at US$2,300 to US$2,500 per tonne.

The main use for aluminium is in vehicles, aircraft and trains. It is also widely used in construction and the manufacture of consumer durables.

China is by far the biggest consumer, taking 39 per cent, with other big consumers including Europe, with 17 per cent, and North America, with 13 per cent.

Demand growth for aluminium has mainly been concentrated in Asia this year and particularly China, which has seen strong growth in the car sector, of about 90 per cent year on year, and the property sector, of 11.6 per cent in the first seven months of last year. Rusal expects China's demand to reach 12.9 million tonnes for last year, an increase of 2.5 per cent over 2008.

BOCI says that provided that demand grows at a sustainable level, 'conditions exist for medium-term price recovery'. Rusal is forecasting global growth of 9 per cent this year after a 9.7 per cent fall in 2008. It also sees China accounting for about 45 per cent of global consumption, North America 8 per cent and Europe 5 per cent as confidence returns.

Rusal's competitive advantage is its access to low-cost electricity for its Siberian flagship smelters, which produce 80 per cent of its aluminium at an average cost of US$1,338 per tonne.

Electricity accounts for 26 per cent of Rusal's costs, compared with the industry average of 36 per cent. With electricity prices expected to rise as environmental concerns result in cleaner but more expensive sources for producing electricity, analysts say Rusal is well placed for higher earnings growth in the years to come. But it will need them to repay its huge debt commitments.

Hard earnings

Estimates say Rusal is in line for a profit this year of at least, in US$: $1b

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