Cheap power lifts Rusal profit
Rusal, the world's largest aluminium producer, is expected to see a substantial drop in fourth-quarter profit margin due to lower prices of the metal, although temporary shutdowns by high-cost producers would limit any further downside.
The company, which is listed in Hong Kong, Paris and Moscow, yesterday posted third-quarter earnings before interest, taxes, depreciation and amortisation (ebitda) of US$705 million, 25 per cent higher year on year. Net profit jumped to US$432 million from US$29 million. It included profits and losses related to fixed-assets impairment and financial derivative contracts.
'Cost savings on power, corporate overheads and distribution contributed to the better than expected results,' said CLSA head of resources research Andrew Driscoll.
'The challenge is that the 14 per cent decline in current aluminium prices from the third quarter's average would weigh on margins in the fourth quarter.'
London Metal Exchange three-month aluminium futures fell to around US$2,162 a tonne yesterday from a high of US$2,803 in late April.
Driscoll estimated Rusal's fourth-quarter ebitda margin would tumble to mid-teen percentages from 22.3 per cent in the third quarter, even as its electricity cost - partly linked to aluminium prices with a three-month time lag - is expected to continue to fall after a 6 per cent drop in the third quarter from the second quarter.
He said he expected margins to improve next year on the back of firmer aluminium prices and lower industry supply.
'Prices will be flattish with limited downside since a quarter of the world's aluminium-smelting capacity is making losses at current prices,' he said. 'Power shortages and deteriorating industry economics will see lower output from China, which accounts for 40 per cent of global smelting capacity.'
Power accounts for roughly 40 per cent of mainland smelters' operating costs, compared with 28 per cent of Rusal's, which is among the world's lowest-cost producers thanks to abundant and cheap hydro electricity in Siberia.
Analysts expect mainland power prices to go up as soon as consumer price inflation falls back to 5 per cent or lower within the next few months, since power generators have suffered widespread losses amid stubbornly high coal prices. Rising power prices will increase smelters' costs.
Global aluminium production may drop by 10 to 12 per cent - mostly due to cuts in China, Europe and the United States - in the first half of next year if prices maintain at current levels, Bloomberg quoted Rusal first deputy chief executive officer Vladislav Soloviev as saying in Moscow.
Chief financial officer Evgeny Kornilov yesterday told Hong Kong reporters that Rusal would consider acquiring rivals amid the current market downturn - the second in three years - although he said the company's priority was completing two existing smelter projects and one hydropower project.
Its target was to cut net debt-to-ebitda ratio to 3 from around 3.75 currently. Rusal's board had not proposed paying an interim dividend despite a recent debt restructuring unfreezing a dividend ban, as it preferred to pay down its debt amid the global financial market turmoil, Kornilov added.