Rusal loses aluminum plant but competitors should not rejoice

The government of Ukraine has seized the only alumina plant in the country from nominal owner Rusal — the world’s biggest aluminum producer — but while Rusal is fighting to regain control of the smelter, the only impact this could have on the company’s rivals is negative.

The Zaporozhye Alumina and Aluminium Complex goes back to the 1930s and even with a hydroelectric plant attached to it is extremely inefficient when it comes to power usage.

Rusal used to crush bauxite into about 227,000 tons of alumina a year at the plant, then further refine it into 113,000 tons of pure aluminum.

However, demand for aluminum cratered in the 2008 recession, taking prices all the way from $3,000 a ton to barely $1,300.

Given those fundamentals, Rusal shut the plant down and left it empty ever since while it concentrated on more modern and energy-conscious facilities.

So even though Kiev has now taken the plant into receivership — effectively re-nationalizing it after spinning it out in 2001 — it is not like Rusal is losing any revenue here, and competitors are not getting any kind of price advantage or chance to steal alienated customers.

Global supply/demand calculations remain the same after the seizure: bearish.

Along with India, China is still the main problem as state-run Chalco (ACH, quote) ramps up production capacity. Western operators like Alcoa (AA, quote) and Rio Tinto (RIO, quote), meanwhile, are struggling to shut down smelters and shift to more profitable operations.

As it stands, China is tracking to become a net exporter of aluminum soon as domestic supply needs — nearly half the world’s industrial demand — are met. 

It’s also possible that Ukraine will try to get the plant running again as a state-run enterprise. Traders who know what this entails can only shudder at the prospect of bureaucrats with little concern for profitability dumping an extra 110,000 tons of finished aluminum a year on an already-saturated global market to claim the revenue and put people to work

Rusal and its rivals would lose in that event, but let’s not get too far ahead of ourselves.

Management at Rusal have promised to fight the seizure, which centers around Ukraine’s claims that the smelter has defaulted on a $75 million debt owed to a state-run bank.

We saw Kiev make a grab for this plant last year, only to have a court throw the case out.

There is no reason here for RIO or AA, much less ACH or the newly minted Global X Aluminum ETF (ALUM, quote), to be celebrating at Rusal’s expense.

Sentiment may be okay, but the only impact this can have on the industry’s fundamentals is neutral to negative.

If anything, Rusal’s 2% decline today may be a buying opportunity for those of you who can actually trade this Hong Kong / Europe-listed stock.

And a quick note on ALUM: while interest in this long-awaited vehicle has helped boost speculative interest in the physical metal and support prices, the fund itself is in bad technical shape.

Like a lot of commodity trades, ALUM lost its grip on the 50-day trend and is now facing some serious resistance.

Sentiment comes and goes in these markets, but right now the trend still points down.

Leave a Reply