Rusal executives ready to woo London investors

Executives from UC Rusal, the titanic Russian aluminium group controlled by Oleg Deripaska, will descend on London soon to woo investors with stories of greener cars, Chinese city traffic and the “stranded electricity” of eastern Siberia. At the centre of Rusal’s pitch to institutions, fund management sources have told The Times, is a bold assertion. Rusal has deliberately positioned itself to exploit the urbanisation and industrial growth of China and now claims that it can put aluminium on to the docks at Shanghai more cheaply than its Chinese rival, Chalco. This week’s three-day roadshow in Britain comes ahead of Rusal’s stock listing in Hong Kong at the end of this month: a closely-watched, all-out drive to raise funds and help Rusal chip away at the company’s $14.9 billion edifice of recently restructured debt. Much of the commentary surrounding the IPO has focused on that figure, and the question of whether stronger aluminium prices and Mr Deripaska’s famously hands-on cost-cutting at Rusal will outpace the relentless demands of its major creditors. The publication of the company’s listing prospectus two weeks ago, along with its controversial warning that Rusal did not meet the Hong Kong exchange’s profit test, provided some ammunition for the bears. But the focus of the roadshow pitch hopes to shift the focus of institutional investors towards Rusal’s secret weapon over rival aluminium producers — an abundance of “stranded” hydroelectric power in Siberia that cannot be moved far afield and is accordingly sold cheaply to local industry. Analysts suggest that, under certain circumstances, aluminium smelting can represent one of the more effective methods of sequestering surplus electricity of the sort that the Siberian dams churn out. The effect is that Rusal, with 80 per cent of its power coming from hydro plants, boasts the lowest electricity bill in a notoriously power-hungry industry. The roadshow pitch highlights Rusal’s average price of only $0.024 per kWH, compared with the $0.05 average paid by Chalco. And, unlike its biggest Chinese and Indian competitors, whose use of coal exposes them to volatile fossil fuel price movements, Rusal’s power costs from Siberia are expected to rise only modestly in coming years. “Given the increasing clampdown of carbon usage around the world and rapidly declining reserves of fossil fuels, we expect the aluminium cost curve to steepen," Liberum Capital analysts wrote in a recent note to investors. "The expectation of higher oil prices and potential for the global application of carbon taxes are both drivers which mean investors should pay a premium for aluminium companies which have access to long term cheap hydro power." No matter how cheaply Rusal is able to produce its aluminium, though, investors who will be meeting the company in London this week said that one overwhelming focus will be the company’s outlook on aluminium prices. “We expect Rusal to present its Hong Kong IPO as a chance to buy a pure aluminium play with exposure to China,” said one fund manager scheduled to meet Rusal in London this Friday, “but it does so at a time when we are getting some very conflicting messages on the aluminium price.” The company’s “reasonable grounds” for believing that it will be able to comply with its covenants and performance targets are reliant on aluminium price forecasts drawn from the futures market. Rusal’s roadshow pitch will be at pains to highlight the argument for long-term firm prices. These include the heavy use of aluminium in the aerospace sector, and the substitution of copper with aluminium in areas such as plumbing and refrigeration. The expected migration of 250 million Chinese into cities by the year 2025 is expected to underpin a large part of that growth. Equally important, Rusal says, will be the increasing use of aluminium in cars. Today the metal accounts for 7.8 per cent of the total weight of passenger cars. That is expected to increase to 11 per cent over the next decade in what would be a significant demand boost for aluminium. But bears on the aluminium price believe that global capacity is more than enough to absorb all of this. A recent surge in the aluminium price — driven, some suspect, by speculation fuelled by low interest funding — has persuaded Chinese smelters to bring some idled plants back online. New capacity about to start-up production in the Middle East is also expected to dampen, or even douse, aluminium prices. Bank of America Merrill Lynch analysts said that latest data suggested that inventories remained high, with the critical “days of supply” across world markets hovering at the 54-day mark. That will remain elevated, Kuni Chen, of BoAML said, amid increasing Chinese production and weak underlying demand in China. Other industry observers have also begun to voice concerns over the swelling quantities of aluminium that has been taken off the market and big exchanges by speculators playing a “contango” trade that requires them to buy and store the physical commodity. Recession has reduced significantly the cost of storing aluminium: some traders have bought large quantities and have moved it to facilities in Liverpool and Rotterdam that are not owned or monitored by the London Metal Exchange. Some analysts believe that aluminium prices are showing “false highs” because such a large quantity of metal inventory is now effectively invisible to the exchanges where the spot and futures prices are set.