Alcoa eyes growth in Russian aluminum demand

MOSCOW (Reuters) - Alcoa Inc (AA.N: Quote, Profile, Research, Stock Buzz) will sell 60 percent of its Russian-made aluminum products to domestic customers this year, up from 50 percent in 2007, as the U.S. firm bets on Russia's economy riding out the global financial crisis. Alcoa's two Russian plants would reverse current losses as demand grows in tandem with reforms in the aerospace, automotive and shipbuilding sectors, Oleg Kalinsky, chairman of the Alcoa Metallurg Rus plant in southern Russia, said in an interview with Reuters. "The economic difficulties will not influence our long-term commitment to Russia, because the market will grow," said Kalinsky, who also handles Alcoa's public affairs in Russia. "The Russian economy is vigilant enough to withstand the crisis." Pittsburgh-based Alcoa said this month it was halting major capital projects due to uncertain global markets. Operations in Russia, where the company is investing $768 million and employs 7,900 people, would not be affected, Kalinsky said in the company's Moscow offices. Alcoa acquired two aluminum fabrication plants in Russia in 2005 -- the Samara Metallurgical Plant, which was the Soviet Union's largest such enterprise, and Alcoa Metallurg Rus, in the southern town of Belaya Kalitva. Neither is yet profitable. "We understood the road would be difficult, as the assets had not been modernized for 20, 30, 40 years," Kalinsky said. He declined to estimate when the plants might first turn a profit. "When you put so much money in, you do everything possible to complete the investment and start turning a profit," he said. Alcoa has spent about 90 percent of the total $768 million it plans to invest in Russia by the end of 2008, including the $257.5 million acquisition price of the two plants, Kalinsky said. CONSUMPTION GROWTH Per capita aluminum consumption in Russia, at 5-6 kg per year, is about seven times lower than in the United States, where the average person consumes between 35 kg and 40 kg. "Per capita aluminum consumption will increase. When it increases, we will develop in line with this market and will satisfy this market," Kalinsky said. "When we increase the quality and volume of our product, consumption patterns will also change," he said, adding that end-users would replace imports with Russian-made products. In early 2009, the company will open a new "end-and-tab" line at its Samara plant to produce parts for drinks cans. The parts are currently imported. Kalinsky also forecast strong Russian demand for aluminum in the aerospace and shipbuilding sectors. "In order to develop a diversified economy, not just based on oil, gas and metals, Russia is going into areas such as aerospace and shipbuilding," he said. Alcoa also will attempt to increase sales of forged aluminum wheels produced at the Belaya Kalitva plant by persuading truck manufacturers to replace the heavier steel wheels more favored in Russia at present. "There has to be a shift in mentality," Kalinsky said. "We will have to market our product long term to increase consumption, to introduce aluminum wheels as a very competitive product in relation to steel wheels." STRONG ECONOMY Kalinsky said Russia, which built its gold and foreign exchange reserves into the world's third-largest during the period of high oil prices, was well equipped to withstand the global financial crisis. "The strength of Russia lies in the fact that the excessive price of oil that we experienced was stored away in gold and currency reserves," he said. As of October 17, Russia held $515.7 billion in gold and foreign exchange reserves. "The Russian economy will have difficult times, but they will not be as severe or as damaging as the crisis of 1998, when we didn't have any internal reserves," Kalinsky said. "The measures taken by the Russian government are timely and efficient." Alcoa's long history and wide range of products -- the company's production spans bauxite to finished products in 34 countries -- would help the company grow in Russia, he said. "Our company has seen pretty much everything in its 120-year history -- the heavy recession of the 1930s, the 1970s oil crisis in the U.S. It all goes in cycles. We're confident Russia will grow and develop."