Metals industry surging in Russia; analysts concerned

Wearing fireproof coveralls, Ilya Dmitriyev plods past a smelter that belches smoke and gushes molten metal, the chief product of this gritty patch of Arctic tundra where the air tastes of sulfur and concrete apartment blocks crumble on the shifting permafrost. This is the home of Norilsk Nickel, a former slave-labor camp that was once part of dictator Josef Stalin’s infamous Gulag. Now, it’s the gray capital of Russia’s glittering new metals empire. Since President Vladimir Putin came to power in 2000, oil and natural gas have driven Russia’s economic rebirth, creating a generation of young Russian billionaires. Now, metal is Russia’s latest natural resource bonanza. The industry’s rise has delighted investors but caused disquiet among foreign security analysts. Some fear that Moscow might use its mineral wealth as a tool for coercive diplomacy, the way that many believe the Kremlin has used oil and gas supplies to punish western-leaning former Soviet nations. As the output of Chinese and Indian factories surged last year, the price of nickel leapt 64 percent to an average of $24,155 a ton on the London Metal Exchange, more than doubling Norilsk Nickel’s profits. Although the price has retreated from a high of more than $50,000 a ton in May, it currently trades at around $29,000 a ton. Workers such as Dmitriyev have benefited. Wages here rose 40 percent in April, and Norilsk’s smelter workers now make about $1,500 a month - triple the national average. The big winners at Norilsk are the company’s two 40-something shareholders, the cautious Vladimir Potanin and the flamboyant bachelor Mikhail Prokhorov. In the past year, their personal fortunes more than doubled, to more than $13.5 billion each, according to Forbes magazine. Russia’s top five metals magnates - including Potanin and Prokhorov - saw their combined value jump 70 percent last year, to $66 billion, Forbes said. Through Norilsk, Potanin and Prokhorov control half of the world’s output of palladium, which is used in catalytic convertors, and one-fifth of its nickel - a key ingredient in stainless steel. Prices have risen sharply for most of the metals that Russia produces, not just nickel. Copper is up 30 percent this year. Average aluminum prices rose 36 percent last year; it is currently trading 8 percent above the 2006 average. Prices of iron ore have doubled in the past three years. Meanwhile, Russia’s low electricity rates and wages have made mining companies more profitable than their competitors abroad. Record profits have driven a wave of acquisitions. Of the $9.5 billion spent on acquisitions by Russian companies last year, metals companies accounted for 84 percent, Russian Mergers & Acquisitions magazine reports. This year, that figure could double. In June, Norilsk acquired control of a Canadian mining operation, LionOre, in a $6.4 billion deal - the largest-ever Russian purchase overseas. The deal adds nickel mines and processing plants in Australia, South Africa and Botswana to Norilsk’s portfolio. Norilsk also controls Stillwater Mining Co. of Montana, the only U.S. platinum and palladium miner. This year it paid $408 million for the Cleveland-based OM Group Inc.’s nickel assets in Australia and Finland. Norilsk is just one of Russia’s metals titans. More than 12 percent of global aluminum output comes from the privately owned UC Russian Aluminum, the world’s biggest producers of the vital metal. Russia’s state-owned mines and stockpiles account for 20 percent of the world’s uranium, more than any single country. A mining company controlled by the state arms exporter, Rosoboronexport, is the world’s biggest producer of titanium.