Russian merger plan will create new king of the hill in aluminum market

Some time in 2007, there will be a new Russian alumina and aluminum giant that will be known as RusAl and will be bigger than the current leaders of the pack, Alcoa of the U.S. and Alcan of Canada. Formally, the company will be incorporated as United Company Russian Aluminum and will be blended from the existing RusAl and the Sual Group, the two Russian smelters, and the alumina assets of Swiss commodities trader Glencore International.

Glencore is the world's largest commodities trader, buying and selling such base metals as aluminum, nickel, copper, zinc and lead. The company had sales of $91 billion in fiscal 2005, up from $71 billion a year earlier, and has stakes in mines, smelters and metals refineries worldwide. By acquiring Glencore's alumina assets, Rusal will gain alumina production in Jamaica and Ireland, which can produce about 4.4 million metric tons annually. About two tons of alumina are used to produce one ton of aluminum.

The merger may not mean all that much in North America since buyers here purchase more mill products than ingot and regional producers, as a group, will retain a hefty capacity lead over the Russian company. Still, the new company will influence European buying patterns and probably metals pricing worldwide since it will have the overall capacity to produce about 11 million metric tons of alumina and about 4.4 million tons of aluminum a year. The new RusAl’s output in 2007 or 2008 will compare with the average annual production of 3.6 million metric tons by Pittsburgh-based Alcoa and 3.5 million metric tons by Montreal-based Alcan.

This will all happen, of course, if the merger is approved by the Federal Antimonopoly Service (FAS) and the European Union's competitiveness agency. Igor Artemiev, head of the FAS, has told reporters his agency is most interested in hearing whether Russian aluminum market competition and domestic prices may change after the marriage.

Still, that may only be a formality since Russian President Vladimir Putin has been lobbying for this merger. He has been overseeing the consolidation of various energy, steel and other nonferrous metals firms into state-aligned companies as surging crude oil, natural gas and commodities prices have underpinned Russia's dramatic yet under-publicized eight-year economic boom.

Russia already is the world's second-biggest aluminum producer, behind China. The former Soviet state also now is the world's biggest nickel producer, fourth-biggest steelmaker and No. 6 copper producer. Oil and gas assets are being consolidated into state-controlled Gazprom and Rosneft, and state-owned weapons exporter Rosoboronexport is buying VSMPO-Avisma, the world's biggest titanium producer.

The architect of the new RusAl is Oleg Deripaska. He is the country's youngest billionaire at age 38, has holdings in various major industrial conglomerates and has emerged as a friend of Putin. (He also has married into the family of former President Boris Yeltsin.)

"The RusAl merger is a key step as Deripaska seeks to properly price and protect valuable assets by creating a national champion, and he can’t do something like that without Putin’s involvement," writes analyst James Fenkner at Red Star Asset Management in Moscow. "This merger is a mutual decision of the state and the businessmen involved," agrees analyst Kyrill Chuiko, at UralSib Financial Corp. in Moscow. "It leaves the firm well placed to buy assets abroad, it'll have political support at the top level."