China to Become Key Driver of Russia’s Aluminum Industry

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May 5 – China is set to become the key driver for the development of Russia’s aluminum industry this year, the market analysis published by the Prime TASS says.

Chinese demand for aluminum is likely to double within 10 years, as car manufacturing, as well as aircraft production and other industries, is likely to gradually move to China amid the rapid economic development in the country, Aton analyst Ilya Makarov said.

China already accounts for about 40 percent of the world’s total volume of aluminum consumption. In 2011, China is expected to increase its aluminum consumption by 15 percent on the year to 18.8 million tons.

Although aluminum consumption in Russia may exceed the pre-crisis level already in 2011, and amount to about 1 million tons, the growth rate in domestic demand is unlikely to be impressive, and the importance of the local market for Russian aluminum producers is likely to remain low, analysts said.

Currently Russian aluminum exports account for 90 percent of the total volume of aluminum produced in the country.

“Russian demand is unlikely to grow substantially, because large foreign carmakers do not have fully localized production in Russia. As for aircraft manufacturing, this industry is currently in poor condition, so it is unlikely to be a driver for aluminum demand either,” Aton investment company analyst Ilya Makarov said, adding that UC RUSAL needs to concentrate on exports to countries where demand is indeed growing.

In January–September 2010, domestic sales of aluminum accounted for 18 percent of the total aluminum sales of Russian producers, Astapovich from VTB Capital said.

Russia’s aluminum production is expected to increase 7 percent on the year in 2011.

Chinese demand for aluminum is expected to grow 12 percent on the year to 18.5 million tons in 2011, according to estimates from UC RUSAL, the world’s largest aluminium and alumina producer. The company said it was “well positioned to benefit from growing demand in Asia.”

China is expected to continuously increase the volume of aluminum imports, which will reach 3 million to 4 million tons by 2015, the company said.

“Amid the current situation in China, UC RUSAL is currently focusing on exporting aluminum to this Asian country, and the share of Southeast Asia in the company’s exports is expected to grow to 30 percent in the coming years,” Bakhtigozin from Arbat Capital said.

UC RUSAL is interested in exports to China, also because the cost of aluminum production in Russia is much lower than in China, as electric power costs US$20 to US$30 per megawatt in Russia against about US$70 per megawatt in China, so UC RUSAL has an advantage over Chinese producers.

UC RUSAL has a geographic advantage when seeking to increase its exports to China, as 85 percent of its aluminum production facilities are located within 500 kilometers of the Russian–Chinese border, the company said.

UC RUSAL’s plants in Siberia account for 80 percent of the company’s production capacity.

UC RUSAL is currently taking part in implementing two more investment projects, such as the construction of the Taishet aluminum smelter in the Irkutsk Region (US$3 billion) and the Boguchansk Aluminum smelter and hydropower plant project in the Krasnoyarsk Region (US$2.6 billion), which will ensure growth in aluminum production in the medium term.

As for direct investments in China, UC RUSAL is unlikely to set up production in this country, Khafizov said, adding “the company is not interested in producing aluminum in China, as electric power (there) is much more expensive than in Russia.”

Also, it is very difficult to enter the Chinese market because of the political factors in this country, he said, adding that another major metals producer, Evraz Group, which operates mainly in Russia, tried to expand into China, but didn’t succeed.

In order to set up production in Russia, Chinese investors need a strong lobby, noted Khafizov from Prime Mark. Moreover, UC RUSAL is unlikely to let its rivals enter the market it dominates, he said, adding that it is generally difficult for foreign investors to enter the Russian metals and mining market.

Besides China and Southeast Asia, UC RUSAL also exports its products to a number of countries in Europe and North America, according to the company’s web site.

At present, Asia is not the main consumer of UC RUSAL’s aluminum, according to data from the company. Asia accounted for only 14 percent of the company’s sales in 2010, while Europe accounted for 39 percent, Russia and other countries of the CIS for 37 percent, and the United States accounted for 9 percent.

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