UC Rusal in search of financial support, cuts one-third production - Jamaican plants may stay closed for a year

With the shutdown this week in Jamaica, United Company of Rusal has effectively idled about a third of its global capacity amid signs the company may need a saviour and could end up in state hands. The worsening situation in the aluminium market saw majority owner Oleg Deripaska taking over operational control of the mining giant as the chief executive officer on January 18. Reports out of Moscow indicate that Rusal plans to shut down the plants for one year. Following discussions between a top official of UC Rusal, the world's largest alumina producer, and the Government of Jamaica, it was announced that due to the impact of low metal prices, weak demand and the overall global financial crisis, the Russian company would be suspending production temporarily at its Windalco, Kirkvine and Ewarton plants effective March 31. Windalco has a capacity to produce 1.15 million tonnes of alumina per year, while Alpart will slow down production by 50 per cent. In addition, Rusal will also be halting production at Euralluminia in Italy for a 12-month period effective March 1, and Interfax is reporting that western media outlets are indicating that mining giant will be cutting production at Ireland's Aughinish Aluminia - Europe's biggest producer with annual capacity of 1.8 million tonnes. Apllying for italian aid Output there is expected to be reduced to 1.175 million tonnes. Eralluminia produces 1.1 million tonnes of alumina per year. "The company plans to apply to the Italian government for subsidies to support plant workers for the duration of the shutdown," Interfax reported. It was also reported in late January that Alpart, which is 65 per cent owned by Rusal and 35 per cent by Norsk Hydro of Norway, would be cutting its production of alumina by half effective at the start of this year from an annual production level of 1.65 million tonnes. Alpart also announced that it had reached an agreement with the unionised workers that would reduce the working hours and salaries of the workers for the next four months with the workers being guaranteed a minimum of 60 per cent of their salaries. Industry analysts are suggesting that a similar type of arrangement might be worked out with the Windalco employees for the 12-month shutdown of the Kirkvine and Ewarton plants. With this crisis management programme, UC Rusal, which produces 14 per cent to 15 per cent of the world's alumina, is effectively slashing its alumina production by about a third. Its overall production capacity is 4.2 million tonnes of aluminium and 11.3 million tonnes of alumina per year. Alumina demand may tumble Global alumina production is running at or around 80 million tonnes, said an economist at the Jamaica Bauxite Institute. Deripaska, speaking on the weekend in Davos at the World Economic Forum, said he expects world aluminium demand to tumble by nearly a quarter this year and that prices will not rebound beyond US$1,600 per tonne over the next seven years. "There is huge oversupply in aluminium ... I believe in the next nine months we will see a completely different landscape for the aluminium industry, which will stay for the next seven to 10 years," said Deripaska quoted in wire reports. Aluminium, used in everything from cars and construction to kitchen foil and drinks cans, last traded at $1,355 per tonne for three-month delivery on the London Metal Exchange - 60 per cent below the record peak of $3,380 struck in July 2008. Deripaska said world aluminium demand would fall to 28 million tonnes in 2009 from about 36.5 million tonnes in 2008. But in addition to the weakening demand and possible oversupply of alumina on the world market in 2009, increasingly worrying reports are surfacing about the overall solvency and future viability of the UC Rusal conglomerate, and possible corporate infighting at the top of the company. Massive debt John Helmer noted in his article 'End Game for Rusal?' in the Central Times dated January 27, 2009, that "Reports from Alfa Bank and UnicreditAton, two Moscow investment houses, estimate that Rusal's debts now total US$17 billion to US$18 billion. While Rusal is not a public company, and we do not have access to information on its debt or finances," Alfa Bank analyst Barry Ehrlich was reported as saying, "We speculate that its fair enterprise value (EV) may be near or even below the current consolidated debt level of the company and its owner." He noted further that "According to Marat Gabitov, metals analyst of UnicreditAlton in Moscow, Rusal is at or close to loss-making for the production of aluminium, and its debts have reduced EV to zero. This is the end-game for Deripaska. His only profitable way out is to persuade his friends in government to let him sell to them on terms that leave him with no debt, no obligations; equity in a new state consolidation; and the right to keep the cash he has already accumulated." Convertible bond In mid-January the company announced that its controlling shareholder, Oleg Deripaska, was taking the reins of the company himself, replacing his veteran administrator, Alexander Bulygin, as CEO. Bulygin was demoted to a non-executive role as chairman of one of Deripaska's many sub-holdings, En+. Reuters, in a story headlined 'Russia could get minority stake in Rusal', quoted Deripaska as saying Saturday the Russian Government could get a minority stake in UC Rusal through the issuance of a convertible bond. While declining to state the actual debt position of the company Deripaska said that talks were continuing with banks about restructuring and "the issue would be announced in under a month." However, Deripaska also indicated that the state was not really eager to take up equity in Rusal. Last year Deripaska, Russia's richest man, was forced to get assistance from Vneshekonombank (VEB) to refinance a US$4.5 billion loan against which he put up UC Rusals 25 per cent stake in the Artic Norilsk company as collateral. As the global financial crisis worsens, he appears willing to sell more stakes in practically all of his companies, including Rusal. Reuters reported that the fate of Deripaska is being closely watched by investors "for indications of future Kremlin economic policy." renee.shirley@yahoo.com