Rusal's China hopes drift into the future
By John Helmer
MOSCOW -
When United Company Rusal, one of the world's largest aluminum producers,
controlled by Oleg Deripaska, invited a 37-man delegation of Chinese reporters
and cameramen to Russia last month, the aim was to get across the message that
China is the central kingdom in the Deripaska empire; that as much or more
investment is promised for China than Rusal has so far committed to Russia
itself for the next few years.
Deripaska's future, wrote a reporter for the Hong Kong Standard, "may depend on
China. It is the mainland's voracious appetite for raw materials that has
fueled a boom in aluminum prices that is expected to continue unabated".
Another Chinese reporter in the delegation reported Rusal chief
executive Alexander Bulygin as describing an investor roadshow in Hong Kong,
which Rusal ran in parallel to the media tour of Russia: "How can I not like
Hong Kong. I have been there twice in the past six weeks."
That show, Bulygin confided, was aimed at finding a handful of Chinese
investors to buy into Rusal ahead of a public share listing. "We plan to find a
whole spectrum of strategic investors - not one, but five to seven different
investors representing different sectors,'' he said. The private Chinese
placement was intended to sell a 2% shareholding stake in Rusal, a later IPO at
selling between 10% and 20%.
At this point, the unlisted private Rusal shareholding breaks down into 56.8%
for Deripaska; 18.9% for Victor Vekselberg and Len Blavatnik, whose rival
Russian aluminum firm SUAL was merged into Rusal on Kremlin orders two years
ago; 14% for Mikhail Prokhorov, a former stakeholder in Norilsk Nickel,
Russia's largest mining company, and Glencore International, the Swiss-based
global trader, with 10.3%.
Deripaska's stake is the subject of a legal challenge in the UK High Court,
where Mikhail Chernoy (also referred to as Michael Cherney) is claiming that,
according to a 2001 contract signed with Deripaska, Chernoy owns at least 11.4%
of Rusal, and possibly more of Deripaska's holding company, Basic Element. On
appeal for the moment, the English judge has ordered a trial to adjudicate who
owns what.
According to the briefings Rusal gave Chinese reporters and investors in
September, the strategic plan is to put Chinese investors in the company second
only to Deripaska. If implemented, this would be unprecedented for a strategic
Russian resource company. It's also a reversal of strategic direction for
Rusal, which began as a China-first company then turned in a different
direction.
How had Rusal come so far so fast, one of the Chinese delegation asked Bulygin
in Moscow. According to the Chinese press report, by following the Chinese
example.
"Let me ask you a question," Bulygin said, according to the report. "How can
Chinese sportsmen be so successful in the last Olympics? The answer is: the
hard work of ambitious people." According to the Standard, "just like Chinese
Olympians, we think UC RUSAL will go far."
China was the dominant buyer of Russian metal when Rusal was formed in 2000,
though at that time Deripaska, Bulygin, and their commercial director, Gulzhan
Moldazhanova, were unhappy at having to cede control of the metal exports and
cashflow to traders like Glencore and Gerald Metals; they bought from Moscow,
warehoused in Hong Kong, and shipped into China when the profit margin was
optimum.
Bulygin and Moldazhanova thought that if they could develop direct
Russia-to-China sales, they could cut out the middleman and earn more for
themselves. But since the traders were able to preserve their role with greater
cash on hand to finance the delays between production, shipment, and payment,
the two Russians were keen to negotiate a substantial working capital loan from
the market.
The first big roadshow to Hong Kong that was launched by Rusal was led by
Moldazhanova in mid-2000. She met there representatives of Standard Bank,
Australian miner BHP Billiton and a US law firm specializing in the China
trade. She also took the ferry to Nanhai, a district of nearby Guangdong
province, to negotiate direct sales of Rusal metal to Chinese buyers - without
having to go through the Hong Kong intermediaries, their warehouses, and
commissions.
Moldzhanova, an ethnic Kazakh, didn't feel comfortable in China, and her
negotiations for direct trade failed. There were disagreements between Chinese
buyers, who wanted to fix contract prices as flexibly as possible, and Rusal,
which wanted to lock in prices far in advance. Rusal executives were
inexperienced at bridging the contract differences because they had never had
to deal directly in China before.
The first Hong Kong roadshow was successful on one score, however, because it
kicked off a process with London-based Standard Bank, Societe Generale, and
ING, which resulted in Rusal signing its biggest financing for the year 2001.
The US$125 million loan that followed, would "finance Russian aluminum's
purchases of raw materials and other inputs", according to a company
announcement at the time.
Sales to China did not take off, however. Moldazhanova, Bulygin and Deripaska
agreed that they stood to make a greater margin of profit on aluminum exports
if they went elsewhere. A Moscow brokerage report on Rusal, dated February
2000, noted that Asia, with 39% of Rusal's exports at the time, was the primary
market; Europe took 31% and the Americas, 30%. But the analyst, Vladimir Titkov
warned, "maintaining its market share in Asia ... will pose the biggest
challenge to the [Rusal] group, as the region is currently experiencing high
growth in its own aluminum production (most notably in China)".
There were troublesome delays also in getting the government in Beijing to let
Deripaska open a representative office for the country. It now has two, one in
Beijing, the other in Shanghai.
As a closely held private concern, Rusal doesn't issue audited public reports,
and its trade figures are only approximate. Fast forward to last month, and it
is clear that, after an interval when Rusal's priorities turned away from
China, there has been another change of direction.
Rusal is "a natural partner for China as strategic supplier", according to a
presentation by sales director Sergei Belsky. Breaking down the company's
exports of aluminum geographically, Asia now receives 46%; Western |Europe,
23%; the former Soviet states, 23%; and the US 8%. The importance of the Asian
market is accelerating. "By 2015, UC Rusal expects to supply 50% of its output
to Asia, of which 70% is projected to China," Belsky said.
That means one-third of all Rusal exports will flow to China. The projections
are based on international estimates of a growing shortfall between domestic
production of aluminum in China and home consumption. That gap is expected to
grow even wider - to Rusal's advantage - elsewhere in Asia.
But the trade projections aren't the only drivers of Rusal's new ambition in
China. To supply the Russian smelters with cathodes, Deripaska has bought the
Lingsi cathode plant in Shanxi province; capacity is being expanded from 15,000
tonnes to 25,000 tonnes. A second cathode plant is at Bagouan, also in Shanxi.
Expansion of capacity there to 20,900 tonnes will cost an estimated $20
million.
That's small beer, Rusal officials have acknowledged in their presentations to
the Chinese market. They are hoping to ride on the shoulders of Chinese
partners in the mining of bauxite and refining of alumina - the raw materials
required for smelting into metal - in the west African country of Guinea; and
to power with newly generated electricity a new 500,000-tonne smelter in
Qinghai province, northwestern China. The price-tags include $1 billion for the
new smelter; $300 million to $500 million to build a new cathode plant; and
another $100 million to $200 million for a new foil rolling plant in China.
According to the Chinese press in Hong Kong, Rusal says it will invest more
than $3 billion in China projects over the next five to 10 years. How much of
that will come from Chinese investors in Rusal has not been made clear. In
September, Rusal told the Chinese media, and those who met Bulygin on his Hong
Kong roadshow, that the group wanted to sell $200 million in shares of an
affiliated mining company, StrikeForce Mining and Resources (SMR); and then up
to 20% of Rusal.
No valuation was made public in Rusal's Hong Kong presentations. But when Rusal
made a similar roadshow to investors in London in June 2007, for a London Stock
Exchange listing that failed to materialize, the company valued itself at $30
billion. In April of this year, when Prokhorov and Deripaska agreed on the sale
and purchase of Norilsk Nickel shares for Rusal shares, plus cash, Prokhorov
accepted a valuation of Rusal at above $50 billion. More recently, Bulygin has
told the Chinese media that he plans to have a capitalization of over $150
billion (HK$1.17 trillion) within five to 10 years.
At a minimum, if the Hong Kong IPO were to sell 10% of Rusal, and if the market
capitalization settled above $30 billion, then more than $3 billion in Chinese
cash would be handed over. On top of the proposed SMR share sale, the strategic
plan appears to have required Chinese investors to fund even more of Rusal's
investment plan than it has said it will spend in China.
According to one Chinese press report in September, ahead of the roadshow, a
market source said the company was expected to raise "at least HK$70 billion".
That is US$9 billion - far more than had been targeted anywhere else in the
world.
But that was September. One month later, after the global equity crash,
Deripaska's holding has been obliged to meet margin calls and loan
refinancings, for which he and his companies lacked the available cash. Three
major assets in Canada and central Europe have already been liquidated and
lost.
Rusal's spokesman, Vera Kurochkina, has announced that Rusal is now seeking a
$5 billion bail-out loan from a Russian state bank to prevent the loss of
Deripaska's stake in Norilsk Nickel from being forfeit to a London bank
consortium. This move followed abortive attempts reported in the Russian press
to convert the $4.5 billion loan from last April into a Eurobond; add more
collateral; or cut the borrowing total. Sources at Basic Element, the Deripaska
holding, say they are also seeking more state money.
Kurochkina has declined to answer Asia Times Online's questions regarding the
extent of Rusal's indebtedness and its repayment deadlines. State banking
sources say that the list of applicants for state bank loans currently numbers
55, but they won't say if Rusal or Basic Element are among them. A maximum loan
limit of $2.5 billion has also been suggested for the emergency financing.
The domestic pressure has led
one Rusal executive to say
that the Hong Kong share sale has been postponed from this year until 2010.
According to press statements by Bulygin, the flotation could take place in 2009,
and it might be in Hong Kong or London. Meanwhile, no private placements by
Chinese investors have been announced.
"Of course Russia is affected by the turbulence in the international financial
markets, definitely," Bulygin said. "Russia is an export economy and with the
slowdown of physical demand, Russian producers will face problems. But not
fundamental ones. To manage the consequences of the crisis in Russia is much
easier, as like China, like Brazil and like India, we are not in the epicenter
of this crisis."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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