Rusal to Invest $5bn in West Africa
By Manson, Katrina
One of the world’s largest aluminium producers, Russia’s United Company Rusal, has reaffirmed its commitment to Africa despite several operational difficulties. In an exclusive interview with African Business, Alexander Livshits, the company’s director for International and Special Projects tells Katrina Manson why Africa is such a crucial piece in its international strategy. Alexander Livshits, Russia’s foreign minister in the mid-1990s and renowned for his reform-minded free market principles, says: “In the coming five years, major Russian industrial and mining companies intend to invest as much as $5bn in Africa.”
Linking up its operations in the same part of the world makes complete sense to the company. “We look to develop integrated production processes in specific regions,” he adds.
“We do not regard investing in Africa as a risk, but as an opportunity. We firmly believe the continent is living up to its long-held potential and will emerge as a major region in the international economy over the coming years.
“By ensuring our raw materials and alumina refining capacity is close to our aluminium smelting operations, we reduce transport costs and can move materials to the smelter more quickly. This maximises our competitive advantage on the world market,” he explains.
There is no doubt the Russian goliath, producing 4.2m tonnes of aluminium and 11.3m tonnes of alumina a year, has a growing commitment to the continent. It has already made its first regional move beyond its base in Guinea. A new smelter in Nigeria, acquired last year, will be able to convert some of the bauxite mined in Guinea into aluminium.
Over the past five years, the price of aluminium has shot through the roof, with spot prices above $2,900 a tonne and hitting a record high of $3,100/t in May 2006. Some heady analysts predict these will rise next year to as much as $4,500/t. Every scrap of bauxite counts.
Although six of Rusal’s expatriate employees were kidnapped in Nigeria and one of its local drivers was killed in June last year, the company says it is determined not to let the ‘unfortunate’ incident affect its commitment to investment in Africa.
The company says this “adheres to its strategy of creating a full production cycle in Western Africa”. Africa has a special place in the company’s history. It was Rusal’s first venture outside the chilly Russian terrain. In 2001 the company took over management of the Compagnie des Bauxites de Kindia (CBK) in Guinea.
This started a wave of expansions that has picked up Armenia, Australia, Jamaica and Sardinia in its wake, among others. Rusal now has 100,000 workers in 19 countries throughout the world.
An IPO is expected within three years, and the corporation – formed by the merger of Rusai, Suai and Glencore’s alumina assets in March 2007 (with 66%, 22% and 12% stakes respectively) – is shifting its global strategy into place. Fourteen smelters, 10 refineries and four mines are already in place.
Testing times
In Guinea, Rusal is looking to exploit the best of bauxite reserves the country has to offer. Guinea is ranked the world’s number one bauxite exporter. However, riots during which more than 70 people were killed last year and ongoing confrontations with trade unions and opposition groups, have made investors wary of this West African country.
The company admits that production at the mine and refinery fell following violent disturbances and the imposition of martial law early last year. As recently as March this year, riots broke out over power outages at Fria lasting three days.
Rusal, not satisfied with deposits at the CBK mine at Kindia, where production capacity is currently 3.33m tonnes of bauxite a year and expected to rise to 3.8m tonnes a year by 2010, is considering another mine and refinery at the huge Dian Dian site, where capacity could reach a whopping 17.6m tonnes of bauxite and 4.4m tonnes of alumina a year.
The company says decisions on how to develop the concession are at the feasibility stage, and gives no projected starting date. However, Livshits did say:
“When Dian Dian comes online it will add significantly to our bauxite reserves and alumina production capacity. The alumina produced will be used within Rusal’s global production process, as production will exceed the requirements of our Alscon smelter in Nigeria.”
Currently, Rusal has to make do with only one refinery operating in Guinea at the Friguia bauxite and alumina complex in Fria. The estimated annual production capacity is 2.8m tonnes of bauxite and 780,000 tonnes of alumina. For years it has managed only a desultory performance.
It will face stiff competition from 2011 onwards once shipments begin from Canadalisted Global Alumina. The Canadian company is building a $4.3bn refinery with a forecast capacity of 3.3m tonnes a year at its concession in Sangaredi.
Rusal refuses to comment on competition but says it has an expansion plan for its Friguia refinery “which is now pending approval by the local authorities”.
Nigerian rally
The big news at present is that its smelter in Nigeria is now operational. Bauxite mined in Guinea can be refined at Friguia with a fair whack of it exported to Nigeria for smelting, rather than being shipped halfway round the world. The company acquired its 77.5% stake in the Aluminium Smelter Company of Nigeria (Alscon) in Akwa Ibom in the southeast of the country from the federal government in February 2007. The two-year privatisation negotiations were fraught – the deal collapsed at one stage and Rusal was monetarily disqualified at another.
“It would be fair to say that it has been quite a challenge,” says Livshits, referring to the protracted negotiations. The plant will employ 2,000 people once it reaches full capacity. Livshits adds that the company has enjoyed the support of the federal, state and local government and their neighbours in Ikot Abasi.
“Accusations of corruption have been dealt with through the courts. Rulings in Nigeria and the US have been in our favour and we are getting on with the business of operating Alscon,” he says.
The $2.5bn Alscon smelter was shut down in 1999 after only 18 months in operation in which it delivered a lacklustre 40,000 tonnes. It produced its first aluminium in eight years in February this year.
“An asset that should have been working for the benefit of the Nigerian people had been left unused,” said Livshits. “We have reconciled the Nigerian public to foreign ownership by delivering on our promises, returning Alscon to the state it should have been in for the past eight years.”
By 2010, Rusal wants to hit a full annual production target of 197,000 tonnes. It is also investing a further $300m. The money will be partly spent on dredging the Imo River in the second half of this year. The rest will go towards making sure transport ships carrying alumina from Guinea can dock and those carrying aluminium can leave without undue delay.
However, it has already encountered dissent from local communities who say their fish stocks will be harmed as a result.
Summoning up the energy
Global market prospects for the commodity are looking good, with demand for aluminium forecast to rise 7-8% this year. However, along with increased US production, high energy costs have squeezed prices, despite continuing demand from China. Energy costs can account for up to 40% of the total costs of aluminium production and tariffs have risen by 150% in the past few years.
High oil prices and a shortage of oil refining capacity have driven up production costs for both alumina refineries and the cost of petroleum coke for aluminium smelters.
Rising costs have helped drive up world prices for aluminium. If UC Rusal can manage to keep a lid on the cost of operations before the competition can, there’s a good margin to be made.
“For any producer of aluminium it is important to secure long- term energy supply contracts, before initiating construction of aluminium smelters, otherwise the produced aluminium will be not competitive on the international markets,” says Livshits.
One of the most important elements of aluminium production is the supply of lowcost energy. For Rusal, West Africa offers not only a sturdy supply of minerals, but also has a unique energy – especially hydro energy potential.
“We have a strong relationship with the Nigerian Gas Company (NGC) for the supply of gas to our power plant,” says Livshits.
He is keen to avoid the same problems that closed down the plant nearly a decade ago. “In today’s economy with high energy prices there are only a few locations in the world that can provide low cost energy required for aluminium production.”
For now, Nigeria fits the bill.
Alexander Livshits, Russia’s former foreign minister who now heads UC Rusai, believes Africa is living up to its long-held potential and will emerge as a major region in the global economy.
Copyright International Communications May 2008
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