UC Rusal has stopped the plant in Ukraine

The UC Rusal company founded by Oleg Deripaska stopped production at the Nikolaev alumina plant in Ukraine against the background of military special operation of Russia, the company reported on March 1.

The release explains that production has been temporarily suspended “due to unavoidable logistical and transport problems in the Black Sea and surrounding areas.” “The number one priority for the group remains the well-being and safety of our employees and their families in Ukraine,” the statement said.

The Nikolaev alumina plant is located in the southern part of the city of Nikolaev, works since 1980. In 2020 UC Rusal completed the project on increase in capacity of the enterprise to 1,76 million tons of alumina (the aluminum oxide received from bauxite – a semi-finished product for aluminum production) a year . According to UC Rusal, the plant is the company’s second largest alumina plant after Aughinish’s plant in Ireland with a capacity of 1.99 million tons per year. The company has a total of nine alumina plants.

In 2021, the Ukrainian company increased alumina production by 2.6% to 1.77 million tons, which is slightly higher than the design capacity. The plant produces one-fifth (21.3%) of the company’s alumina. According to UC Rusal, last year most of the holding’s plants operated at levels close to the design capacity, with the exception of Friguia in Guinea (production – 414,000 tons, 63.7% of capacity) and Windalco in Jamaica (448,000 tons, 37 %). Total alumina production in 2021 reached 8.3 million tons, which is 78.6% of the design capacity of UC Rusal plants.

The representative of the company assures that the stop of production at the Nikolaev plant won’t essentially affect volume of release of aluminum of UC Rusal.

Experts interviewed by Vedomosti agree that the company will be able to compensate for the falling volumes of alumina by reducing the supply of raw materials to other companies. Sergei Grishunin, Managing Director of the NRA Rating Service, notes that up to 30% of all UC Rusal alumina production is exported, so a technically short-term shutdown of the plant should not cause significant damage to the company’s business. Dmitry Puchkarev, an expert on the BCS World of Investment stock market, agrees with him. According to UC Rusal, in 2021 sales of alumina to third parties amounted to 20% of total production of 8.3 million tons.

UC Rusal can partially compensate for the falling volumes at the expense of other assets, adds Veles Capital analyst Vasily Danilov. In the event of a short-term shutdown, the company can also use stocks of raw materials or purchase alumina on the market, said Alexei Pavlov, chief analyst at Otkrytye Investitsii on the Russian stock market. Therefore, a short-term shutdown is unlikely to affect the volume of aluminum production, he believes.

Puchkarev adds that it is unclear how long the plant will be idle. According to Danilov, the company will have to buy alumina on the company’s market at exchange prices, as a result the company’s costs will increase. It will be possible to count them, according to him, only after the Nikolaev plant will work again.

According to Grishunin, UC Rusal can afford to purchase raw materials from external suppliers, as the company’s electricity costs are many times lower than most competitors (the share of electricity in the cost of aluminum production reaches 30%. – “Vedomosti”). The alumina segment provides 10% of UC Rusal’s revenue, says Grishunin. But, in his opinion, the shutdown should not last more than two months, so the effect for the company should be insignificant. There are no problems with the raw materials – bauxite – now, the analyst adds. According to UC Rusal, most of the bauxite (over 50%) is mined in Guinea, while Russian production accounts for 38%.

UC Rusal did not answer Vedomosti’s clarifying questions.

Aluminum will continue to rise in price on the market amid risks of a possible blockade of Russian energy supplies to Europe, Grishunin said. Therefore, the news of the shutdown of the plant is unlikely to have a stronger impact on prices than the risks of the energy crisis in the EU. In the event of significant disruptions in the production of UC Rusal, which provides about 5% of the world’s supply of aluminum, metal prices may well rise much above current levels, Danilov said.

The price of aluminum on the London Metal Exchange (LME) on February 28 reached a new all-time high – $ 3445 per 1 ton. On March 1, three-month futures for the metal continued to grow and traded at $ 3457 per 1 ton.

Against the background of news of problems at the Nikolaev plant, shares of UC Rusal on the Hong Kong Stock Exchange fell by 14.3% to $ 4.69 Hong Kong dollars ($ 0.66) per share. Trading on the Moscow Stock Exchange on March 1 was not carried out. According to Danilov, in the current geopolitical situation, fundamental factors (sales, revenue, costs, etc.) have a secondary impact on quotations.

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