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Rusal calls for aluminium production to be cut

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The deputy chief executive of Rusal, the world’s largest maker of aluminium by volume, has called on non-Chinese aluminium producers to cut their production by 2m tonnes to end the oversupply that has pushed smelters into losses.

Oleg Mukhamedshin, also Rusal’s director for strategy and business development, said: “The industry needs to be more disciplined.” High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail.

The world’s aluminium producers – including Rusal, Alcoa and Rio Tinto – are feeling increasing pressure from low prices of the metal, but output cuts have been insufficient to remove the metal surplus from the market and output in China is still expanding.

The problem has been especially acute for the Russian group, which has been struggling to service its net debt, which stood at $9.9bn last month. To strengthen its cash flow, Rusal, led by chief executive Oleg Deripaska, needs higher revenues. For that, it needs the aluminium price, which has fallen about 40 per cent over the five years, to recover.

The worry for Rusal is that the market dynamics that normally control supply in the commodities markets do not seem to be working in aluminium.

“In China, the government subsidises lossmaking smelters; vertically integrated companies let profitable downstream products subsidise losses upstream; and multi-commodity groups let other metals subsidise aluminium,” Mr Mukhamedshin says in an interview on the sidelines of the International Aluminium Conference in Geneva.

Rusal, which suffered a $439m operating loss in the first half of 2013, made interest payments of $406m in the same period. Debt levels have fallen faster than some analysts have expected, but its shares have more than halved since the beginning of the year, to HK$2.37.

The Russian aluminium producer also relies on future dividends from its stake in Norilsk Nickel to service its debt. Vladimir Potanin, Norilsk Nickel’s single biggest shareholder with 30 per cent and chief executive, last week told the Financial Times that the company will “make some adjustments to the dividend policy”.

The weak aluminium price has also hit others in the industry. Rio was forced to scrap the sale of Pacific Aluminium, which has high-cost smelters in New Zealand and Australia and an alumina refinery.

Rusal is doing what it preaches. The company is on course to cut its own production by 357,000 tonnes this year, from the 4.17m tonnes it made in 2012. Taking the costliest production lines out of use will save the company about $50 a tonne, or $170m-$180m a year, according to Mr Mukhamedshin.

“If everyone [outside China] cuts 7 per cent” the industry can achieve the annual production reduction he wants.

While Mr Mukhamedshin does not expect increased “discipline” from Chinese smelters, he thinks the Chinese market as a whole will remain balanced. “I don’t think we will see aluminium exports from China.”

But he thinks shareholder pressure will force non-Chinese companies to cut supply. He says that with new chief executives at the helm of Rio and BHP Billiton, “it will take them some time to act, but once they do, they will act fast”.

However, some analysts say the inventory of the metal is too big for a few companies to make a difference. World aluminium stocks stand at about 12m to 13m tonnes, according to Macquarie in London. This is the rough equivalent to three times the annual output of Rusal.

“You could shutdown Rusal for three years and the market would not even notice,” says Duncan Hobbs, metals analyst at Macquarie.

Other analysts echo Rusal’s view. Standard Bank, which predicts annual surpluses over the next few years, says: “It seems some degree of supply-related discipline will be required in order to start the rebalancing process.”

Although many in the market expect the aluminium price to remain depressed, Mr Mukhamedshin is hopeful that the physical price will drift up to $2,400-$2,500 a tonne “in two to three years’ time, if the industry behaves the way we expect now”, from the current $2,000 level.

“If it takes action to cut supply” it could be faster, he says, adding Rusal itself stood to cut more if necessary.

Source: The Financial Times