Part of Palms & Company's Commercial Intelligence Assistance as Purchasing

Agent for Buyers of Russian Aluminum billets and ingots

WHOM TO DO BUSINESS WITH TODAY IN RUSSIA'S ALUMINUM INDUSTRY

Who has state of the art technology and competitive prices

Who controls the raw materials base for Aluminum production

Russia's non-ferrous metals sector contradicts economic theory about the

need for competition in market conditions. The sectors most successful

companies have few serious competitors within the country and do battle

with Western rivals rather than among themselves. Companies have been less

successful in competitive sectors such as the secondary resources

industry, the cable industry and production of precious and rolled metals.

At the end of 2000, Russian business made the front pages of the Wall

Street Journal and the Financial Times for the first time since the

default of August 1998. The event in question was the creation of the

Russian Aluminum (Rusal) company. With 80 percent of Russia's aluminum

production capacity in its hands, Rusal became the worlds third largest

aluminum producer, after U.S. giant Alcoa and Canadian-French alliance

Pechiney-Alcan (PA).

As with Russia's ferrous metals business, the country's aluminum sector does

not have much in common with that of other countries. Russia's three

largest aluminum plants Krasnoyarsk (KrAZ), Sayansk (SaAZ) and Bratsk

(BrAZ) are among the five largest in the world. Neither Alcoa nor PA

(French Pechiney and Canadian Aluminum) see the need for plants as big as these.

Russian aluminum production methods the so-called vertical and horizontal

Soderberg technology are outdated. Only the Pechiney-designed Sayansk

plant, the newest of the Russian plants, is as modern as Western plants.

Western plants are more compact and produce at a cost price 20 percent

lower than in Russia. But the cost accounting used for this does not

apply in reality and ignores differentials in energy costs.

Rusal owns the three large Russian plants and also has claims on the

Novokuznetsk aluminum plant, which it is trying to secure from Mikhail

Zhivilos MIKOM group. The only thing that saves this aluminum giant from

bankruptcy, however, is not so much high labor productivity as low

electricity rates.

Officially, nothing is known about just who owns this prominent and, for

the time being, competitive enterprise. Officially shareholders in oil company

Sibneft are said to control half the shares in Rusal. The Sibneft link in turn points

to Roman Abramovich, now governor of Chukotka, and his partners who are

rumored to include Iskander Makhmudov and even a certain "criminal

boss" by the name of Salim. (This Salim is probably Yakub Salimov, a

partner in TadzhAZ and a former Tajik opposition leader.)

ROMAN ABRAMOVICH may have links with Rusal through his Sibneft company.

Privately I am aware of the two parties, not mentioned in this official

information which actually own and control Rusal.

Officially, he remaining shares are owned by Siberian Aluminum (Sibal) shareholders,

though they are also not officially named. All that is officially admitted is that Rusal

Director Oleg Deripaska holds a small stake, while major stake-holders are

said to include Mikhail Chernoi and the TWG Group, which has changed

business from owning aluminum plants to acting as their trader in Europe

and the United States.

Rusal exports up to 85 percent of the aluminum it produces, though

Deripaska had at one point wanted to go into producing rolled aluminum and

invested a sizeable sum in developing the Sameko plant Europe's largest

aluminum finished-products manufacturer. Deripaska even bought and

completed construction of the Dmitrov DOZAKL plant, which produces

aluminum cans for beverages. But after Abramovich and Sibal created Rusal,

Deripaska's interests in rolled aluminum and beer cans were put on the

back burner.

These days, Deripaska is more interested in developing the raw materials

base for aluminum production, which is compatible with Chinese Interests.

Rusal's founders quickly realized that Russia did not have much bauxite

and alumina ore to feed the country's giant plants.

Formally speaking, however, Rusal is not at all a major Russian company

(which it should be, according to its consolidated turnover), but is a modest

legal entity registered in Omsk and owning practically nothing at all.

This is because Rusal still has not been formally registered as a united

holding. Even when the group issued ruble-denominated bonds for 2 billion

rubles in September, the official issuer was Bratsk aluminum plant.

With Rusal controlling 80 percent of Russia's aluminum production, almost

all the remaining 20 percent is in the hands of the Siberian-Urals

Aluminum Company (SUAL), which doesn't have any raw material supply

problems.

The company was founded by Viktor Vekselberg, a former KrAZ shareholder

who together with his partner Vasily Anisimov from the Transconsult group

was pushed out of KrAZ by Rusal.

Anisimov also planned at first to take part in developing SUAL, but it

seems he could not handle the criminal aspects of the aluminum business.

Vekselberg turned out to have tougher nerves and more persistence. He

formed an alliance with Alfa-Group, with whom he invested in buying the

Tyumen Oil Co. In Alfa's Mikhail Fridman, Vekselberg found a reliable

partner without interests in the aluminum sector. (Alfa-Group controlled

the Achinsk alumina-ore plant, but later handed it over to Rusal.)

Poor refining facilities

Among other things, SUAL owns the Timansky bauxite deposit Europe's

largest. But the company's secure raw material supplies are offset by

insufficient refining facilities. SUAL's Bogoslovsky, Kandalaksha and

Nadvoitsky plants are smaller and technologically more backward than those

of Rusal. Only its Irkutsk and Urals plants use the same technology as

KrAZ and BrAZ, but have less capacity. SUAL, however, controls shares in

Irkutskenergo, Russia's largest electricity producer after Unified Energy

Systems (UES), and its access to cheap electricity helps to keep

profitability at an acceptable level.

THE SIBERIAN-URALS Aluminum Company (SUAL), headed by Viktor Vekselberg,

controls almost 20 percent of Russia's aluminum production.

The only other aluminum producer of any significance in Russia is

North-West Aluminum, controlled by St. Petersburg entrepreneur Alexander

Sabadash and the Aimet holding company. North-West Aluminum owns the

Volgograd aluminum plant, the Pikalevsky alumina-ore plant and the

Volkhovsky aluminum plant. As a rule, attempts by potential players on the

aluminum market to build new plants have ended in failure. The existing

big Russian companies do not need any competition, and there is already

enough competition on the world market other than The United States..

How the Russian aluminum market will continue to develop in its current monopolized state is a

question I believe China could turn out to be a very logical partner in resolving. There are

also opportunities for China to play a role is solving Russia's alumina and other raw

materials supply problems. On the one hand, globalization of

the aluminum business gives Rusal the opportunity to attract investment to modernize its

plants, but on the other hand, the only potential suppliers of new technology are Rusal's

competitors Alcoa, PA and U.S. Kaiser Aluminium. Kaiser, faced with energy costs of

$1540 per metric ton in the U.S. is getting out of production, choosing instead to receive

payment for energy is agrees not to use.

Negotiations with these companies have so far brought no more than vague

promises to "be friends." The rival companies usually insist on wanting to

buy shares in the Russian plants, but Rusal's owners have so far refused

all such offers. SUAL and North-West Aluminum have even fewer hopes of

raising the money to modernize their plants it is easier to simply build

new ones.

OTHER NON-FERROUS METALS

There is even less competition in the Russian nickel and platinoid sector.

There is essentially only one company in the whole country involved in

this highly profitable business, and that is GMK Norilsk Nickel, or simply

Norilsk Nickel, as it used to be called. Norilsk Nickel is controlled by

Vladimir Potanin's Interros Group. In August 2001, Mikhail Prokhorov

replaced Dzhonson Khagadzheyev as general director of Norilsk Nickel.

Norilsk Nickels output contributes 4 percent of Russian GDP, but the

company is not just big by Russian standards, it accounts for almost half

of world platinoid production and 20 percent of nickel production. It is

also Russia's largest copper producer. Only two other Russian companies

produce any significant quantity of copper Yuzhuralnickel and

Ufaleinickel in the Chelyabinsk Oblast though their production is more of

a sideline to their copper production activities. All in all, Norilsk

Nickel does not have any real competitors in Russia.

Norilsk Nickel is an unusually well-balanced company. It gets its energy

from local gas monopoly Norilskgazprom and does not have any serious

energy problems. As for raw material supplies, the Norilsk deposits are

forecasted to last for hundreds of years. Sales are no problem either.

World markets start trembling when Norilsk Nickel cuts back production

volumes.

The Norilsk company also forms the foundation of an entire city within the

polar circle, where living standards were falling fast until Interros took

over. Living standards in Norilsk are now almost at Moscow level. The only

cloud on the horizon is restrictions on Russian precious metals and

platinoid exports.

Norilsk Nickels platinum and platinoid exports depend totally on the

Finance Ministry, Gokhran (the state precious-metals repository) and the

government, who set quotas and are thus able to regulate the firms

profit-making opportunities. Platinoid exports are handled by export firm

Almazyuvelirexport, which is affiliated with Gokhran.

So, Norilsk Nickel faces a certain amount of regulation of its business,

and constant threats of re-nationalization (Interros got control of the

company through the loans-for-shares scheme). But this doesn't stop the

company joining Rusal on the very short list of Russian enterprises that

actually have some weight in the world economy.

Extending domains

Now, Interros wants to extend its domains beyond the Arctic north and is

currently holding negotiations on buying a stake in a nickel deposit in

New Caledonia. The company also still has hopes of sooner or later taking

part in developing the nickel industry in Cuba. The nickel mines and

plants in Cuba were built by Soviet specialists, but in recent times,

Canadian companies Norilsk Nickels competitors have begun making inroads

on the island. This explains why Norilsk Nickel always tries to make sure

it has a representative in any official delegation visiting Cuba.

It is not yet clear how much new General Director Mikhail Prokhorov will

try to change the company's policy. Prokhorov has said that he wants to

make Norilsk Nickel a "world-class company."

The other Russian nickel producers are a lot smaller. Norilsk Nickel

exported 185,000 tons of nickel in 2000, while its competitors

Ufaleinickel, the Rezhsky nickel plant controlled by Mark Leivikovs

Geolink company and Yuzhuralnickel, controlled by Chelyabinsk steelworks

Mechel each exported 10,000-15,000 tons.

As with nickel, Russia does not have many major producers of copper,

another metal with worldwide demand. Copper producers aside from Norilsk

Nickel include the Urals Mining and Metals Company (UGMK). Of all the

assets ascribed to Iskander Makhmudov, UGMK is the only one he is more or

less officially linked to. Makhmudov began his business with UGMK, or

rather, with its component company Uralelektromed. Uralelektromed is

headed by Andrei Kozitsyn, Makhmudov's long-time partner, who has taken

part in most of UGMK's battles for assets, including the seizure of the

Kachkanarsky GOK (mining and enrichment company).

UGMK is a holding that unites some 30 copper-producing companies. The

largest of these are the Gaisky GOK, Uralelektromed, Svyatogor and

Safyanovskaya Med. UGMK is the only company in the non-ferrous metals

sector to have launched a program to upgrade its production facilities,

which has now been going on for four years.

Like Rusal, UGMK faces a raw materials supply problem, though not on as

acute a scale. This is why UGMK is so active in looking for new resources.

Together with the Railways Ministry, UGMK owns the Zabaikalsky Mining and

Ore Co., which is to develop the Udokansky copper deposit. (It is possible

that British company Bateman will also join this project).

For the time being, UGMK makes up for its raw-materials shortfall by

buying supplies from other companies. Its suppliers include the

Valentorsky copper deposit, which belongs to SUAL, and two companies in

Bashkortostan the Sibaisky GOK and Uchalinsky GOK. Raw-materials

processing started a conflict between UGMK and Russia's third biggest

copper producer Kyshtym Medelektrolitny plant (KMEZ).

KMEZ is a purely regional company with no support from Moscow and no

well-placed connections. KMEZ General Director Alexander Volkhin and his

management team control 50 percent of shares in the company, with the

other 50 percent owned by the workforce. When the conflict with UGMK began

in May this year, specialists from OPS Uralmash arrived at KMEZ. The OPS

in Uralmach's name stands for "public-political union," but the Russian

letters can be and are read as standing for "organized crime group." It

is not yet clear whether Uralmash has taken KMEZ and Volkhin under its

wing or bought shares in the plant.

RARE METALS

Aside from the companies producing copper, nickel and aluminum, Russia has

a whole host of companies producing much rarer and more expensive

non-ferrous metals ranging from tungsten to lantanoids. These companies

include Dalpolimetal, controlled by Glencore, and state-owned Sevredmet,

but none of them are well known. The only exceptions are two large

companies that work together VSPMO and Avisma. These two companies

control 70 percent of the rolled-titanium market in the United States and

managed to sign a 10-year contract to supply rolled titanium to Boeing.

The problem now is that with the exception of Eastern Siberia, where

little development work has been done, non-ferrous metals deposits are not

very big. But across the entire former Soviet Union, from Western Ukraine

to Uzbekistan, there are plenty of non-ferrous metals plants all trying to

find their place on the Chinese export market the same market that the

Russian companies are working for.

The government had been planning to unite all the companies in which it

still held a large stake in a state holding this year. A company like this

would have had a chance of becoming a serious player on the world

rare-metals market, but for some reason, the project did not go ahead.

Probably, the explanation is that the country is making enough money by

exporting nickel, copper and aluminum.

Courtesy of Palms & Company, Inc.

First, Wholly American Owned, Washington State Corporation

Licensed by Ministry of Foreign Economic Relations of the Soviet Union

in 1989

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