File
Oleg Deripaska, majority shareholder in UC Rusal.

R. Anne Shirley, Business Writer

Dr Cartlon Davis, one of the most respected authorities on the bauxite alumina industry, pointed out in May that the ownership structure has moved from a very stable group of four of the six 'majors' in the field - Alcoa, Alcan, Reynolds, and Kaiser.

Davis in an article published in The Sunday Gleaner of May 25 wrote on the recent changes in the ownership structure of the various entities in the Jamaican bauxite/alumina sector, as well as the impact of rising oil prices on the costs of production and bauxite quality.

Over 56 years, the Jamaican operations were an integral part of the vertically integrated structure of the four corporations.

"These four companies, (plus Pechiney of France and Alusuisse of Switzerland) bestrode the international aluminium world like a colossus to form the 'Six Sisters' (borrowing from the term applied to the powerful seven companies then operating in the international petroleum industry) of the alumina industry," Davis wrote.

"In this relatively settled environment, both government and management knew with whom they were dealing."

Major player

This is no longer the case, and currently the major player in the Jamaican market is the giant Russian aluminium company UC Rusal which was formed in early 2007 out of a merger agreement between the giant Rusal - 68 per cent; SUAL, a smaller Russian company - 20 per cent; and Glencore International AG, the Swiss firm that along with its predecessor Marc Rich had been involved with the Jamaican alumina/bauxite industry since the 1970s - 12 per cent.

The new merged entity has its headquarters in Moscow, and its major shareholder is the richest billionaire in Russia, Oleg Deripaska, owner of a metals-to-agriculture conglomerate.

Deripaska has a 57 per cent stake in UC Rusal.

UC Rusal owns the Windalco Kirkvine and Ewarton works, as well as 65 per cent of Alpart. Hydro Aluminium of Norway owns the other 35 per cent.

"It is pertinent to point out that the major owner of Rusal (and UC Rusal), Mr Deripaska, has just purchased 25 per cent of the Arctic Norilsk Nickel company for about US$13 billion; and it is understood that this purchase has 'distracted' him somewhat from addressing the issues of assets like those in Jamaica," Davis wrote.

Norilsk is the supplier of one-fifth of the world's nickel, and when the acquisition was made by UC RUSAL, the corporation indicated its intent to eventually create an international metals major by combining the two companies.

Power struggle

In order to make the acquisition, UC Rusal had pledged its shares in Norilsk as collateral for a two-year US$4.5 billion loan from a syndicate of nine creditors on the international market.

However, since that time Norilsk's stock has plunged almost 60 per cent from its peak in May 2008 as global nickel prices have plummeted, western investors have fled the Russian stock markets, and UC Rusal has become involved in a power struggle with the other major shareholder in Norilsk - the largest single shareholder, Russian Vladimir Potanin and his company Interros - over the management of the company.

UC Rusal had also announced a large scale investment plan for the next few years, despite the setbacks of the financial crisis and the sharp fall in metal prices.

Projected investment

Up through September 2008 the conglomerate had indicated that, excluding acquisitions, it was planning to invest between US$2.5 billion and US$3 billion to fund organic growth and greenfield projects every year for the next five years. This is a total projected investment of around US$10 billion to US$15 billion overall.

The firm also announced in mid-September that it would be investing approximately US$3 billion for the construction of three aluminium smelters in China over the next seven years.

This move into China signals the importance of the Chinese market to UC Rusal's growth prospects. The CEO of the group, Alexander Bulygin, told EuroWeek that he expects China to generate about 50 per cent of UC Rusal's total revenue in the future.

However, it will be interesting to see if any of these plans will have to be revised or postponed for the foreseeable future.

On October 30, it was announced that UC Rusal was the first beneficiary of a US$4.5 billion loan package from the Russian state-owned bank Vnesheconombank (VEB), which was entrusted with US$50 billion by the Kremlin.

Those funds were drawn down from the world's third largest gold and foreign exchange reserves which stood at US$515.7 billion in mid-October to bail out indebted Russian firms facing margin calls on Western loans before the end of 2009.

The news reports out of Moscow indicate that the loan was made because UC Rusal was facing the threat of having to hand over its stake in Norilsk to overseas creditors unless it managed to refinance the original loan.

Financial crisis

Deripaska, the major shareholder in UC Rusal, had been forced in the financial crisis to relinquish his stakes in a number of foreign companies including the Canadian auto parts maker Magna International Inc and the German builder Hochtief.

In the case of the UC Rusal stake in Norilsk Nickel, it is clear that the Russian government was not willing to relinquish Russian majority control in that entity and signals the Kremlin's intention to keep certain strategic assets in Russian hands.

It should be noted that in addition to nickel, Norilsk also produces half of the world's palladium from its mines above the Artic Circle.

Of importance to Jamaica, UC Rusal is leading an approach to the Russian Government with a proposal to create a strategic state metal reserve.

Such a metal reserve is seen as a way to stem the crisis in the Russian metal processing industry, as it will work not only to diversify government investments, but would also help to stabilise metal prices.

Proposal

They are proposing that Russia should try to obtain intergovernmental agreements to be signed with a number of countries to cut aluminium production by 10 per cent for the next two years as a way to shore up the market.

It will be important for the Jamaican government and the local alumina/bauxite industry to keep tabs on these events as there could be significant repercussions for Jamaican exports.

This bauxite alumina sector is Jamaica's third largest foreign exchange earner behind remittance and tourism earnings.

rashir0@hotmail.com

SOURCE: Financial Gleaner, Friday, November 28, 2008