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Article Excerpt
IN BRIEF
Editor's Choice
*** With the increasing impact of the ongoing crisis, it seems no industries have been left unscathed and that things are only getting worse for the metals industry. For example, managers at Evraz, Severstal and TMK said last week that they were cutting output, and reviewing production targets and investment plans for this year and next. They are tightening their belts mainly because of a drop in global demand and prices for their metal. However, it transpires that the global crisis is not posing too much of a threat to Russia's own base metal producers. Norilsk Nickel said at the end of October that it was trimming staff at its Moscow office by around 10% "to optimize cost structure", but said employees at its industrial sites in Norilsk would not be affected. UC RUSAL, one of the world's biggest aluminum producers, also claims to be unaffected by the global crisis, saying it's hopeful of taking advantage of this difficult time to strengthen its position in the mining and metals industry.
*** Magnitogorsk Iron & Steel Works is not thinking of asking the government for funding and plans instead to seek a commercial loan, possibly through VTB bank, the company's financial director said. Meanwhile, a company source said that MMK is running at less then half capacity and that the company's November sales were 75% below target. MMK plans to cut budgeted capital expenditure 40% in the fourth quarter and has said it is suspending many investment projects at its main site in Magnitogorsk. Elsewhere, MMK is holding negotiations with suppliers of crude iron ore and coking coal on a reduction in procurement prices. The steel major has also stopped shipping steel to the GAZ automobile plant after the latter's debts to MMK soared to around 3 billion rubles. Pipe makers are said to owe MMK 8 billion rubles. In total, MMK's clients owe the company 25-27 billion rubles.
*** VSMPO-Avisma, the world's main supplier of titanium for the aircraft industry, is preparing to cut production in 2009 and to review its investment program. At present the company is working as normal, but the corporation's legal affairs and PR manager said that the company is assessing the need of its clients in 2009, adding that there will be no growth in production. He also said that VSMPO will in all likelihood have to review its investment program. VSMPO has also forecast that its order book could shrink by up to 50% if Boeing and Airbus buy less titanium due to the financial crisis. The extent of the possible cut in procurements has not yet been determined, but the company is preparing for two scenarios, Yevgeny Romanov, VSMPO-Avisma's general director said. Orders will shrink 30% under the moderately pessimistic scenario, and 50% in the worst-case scenario, he said.
*** Alisher Usmanov's Metalloinvest has lent 3.3 billion rubles and 2.022 billion rubles to its iron ore subsidiaries Lebedinsky Mining & Processing and Mikhailovsky Mining & Processing, respectively. The holding said the deals were closed on September 17 and that the loans would be repaid by September 16, 2011. Metalloinvest's shareholders endorsed the transactions on October 27. The shareholders also approved a guarantee to ZAO ING Bank (Eurasia) for a EUR 22.9 million credit facility for the holding's Urals Steel plant, repayable in 2.5 years.
*** Alrosa said the dollar's gains against the ruble were responsible for the drop in the Russian diamond monopoly's net profit to Russian Accounting Standards (RAS) for January-September 2008. However, an Alrosa representative told Interfax that the company had budgeted for a drop in net profit in the third quarter, saying that it wasn't unexpected and it wasn't caused by the financial crisis - it was written into the budget, which the company drafted at the end of last year. The company had expected profit to fall more than 5 billion rubles against 2007. More than half of that amount was seated in inflationary cost growth, the dollar's appreciation against the ruble, harder mining conditions, higher amortization charges and a considerable increase in property tax connected with the company's federalization.
*** The joint venture between Russian oil major Lukoil and the De Beers corporation will be registered before the end of the year, Lukoil President Vagit Alekperov said. Lukoil has received the appropriate clearance from the commission on access to strategic projects and resources, with Alekperov saying that the documents are now undergoing technical finalization. As for when the venture would be registered, Alekperov said that he believed it would be this year, adding that the venture's domicile will be Arkhangelsk.
*** Uzbekistan's Navoi Mining & Metals Plant has commissioned the major new Northern Kanimekh uranium mine in the Central Kyzyl Kum, a source in the company's management said. Commercial production there as well as pilot production at the new Yarkuduk and Alendy fields ought to boost Navoi's uranium output 30% this year, the source said. North Kanimekh is considered one of the most significant uranium industry sites to have been commissioned in Uzbekistan in recent years. The first stage of the mine cost approximately $34 million, which Navoi funded itself. Drilling and well construction began in the middle of 2007. The first stage is expected to achieve full capacity by 2012.
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What's the Russian base metals sector keeping so quiet about?
MOSCOW. (Interfax) - Concerns that the global financial crisis might spill over into the real sector are already a thing of the past because this has already happened. It seemed no industries were left unscathed. Managers at some of Russia's biggest iron and steel companies, among them Evraz, Severstal and TMK said last week that they were cutting output, and reviewing production targets and investment plans for this year and next. They are tightening their belts mainly because of a drop in global demand and prices for their metal, an increase in the cost of borrowing and the threat of margin calls on existing loans.
But the base metals sector seems to be an exception: most companies here are standing by their production and investment targets, or prefer not to discuss this subject at all.
World prices and demand for nonferrous metals
Analysts at the world's biggest banks are lowering price forecasts for nonferrous metals for this year and next, as well as forecasts for the share prices of publicly traded companies in the sector.
Goldman Sachs Group, for example, has reduced price forecasts for copper, aluminum and other nonferrous metals in 2009 in light of slowing global economic growth and a decline in demand in China. The bank's analysts expect the price of copper to be $3,500 per tonne in 2009, which is 56% less than the previous forecast. They project the average price of copper will be $4,000 in the next six months, and $6,625 per tonne in the next 12 months, or respectively 52% and 26% than previous forecasts. The price forecasts for nickel have been lowered 41% to $11,285 per tonne in the next three months, 29% to $11,000 in the next six months and 24% to $14,375 in the next 12 months.
The three-, six- and 12-month average price forecasts for lead have been cut by 27% to $1,360 per tonne, 29% to $1,300 and 14% to 1,525, respectively, and those for zinc have been lowered by 16% to $1,335 per tonne, 29% to $1,300 and 15% to $1,640.
Analysts at Merrill Lynch have slashed their price forecasts 41% to $2.25 per pound for copper, 19% to $1.10 for aluminum, 27% to $0.66 for zinc and 36% to $7 for nickel.
Citigroup analysts now expect prices to be $2 per pound ($4,409 per tonne) for copper, $1 for aluminum and $60 for uranium, or respectively 45%, 23% and 45% lower than the previous forecasts.
Other banks and investment funds, including Morgan Stanley, have also revised their forecasts.
The actual picture does not inspire optimism: copper prices have tumbled 41% since the beginning of the year and 36% in the past month, nickel prices dropped 24% in October, and aluminum stocks monitored by the London Metal Exchange rose to their highest level since 1995 on November 3 while the metal is trading at about $2,000 per tonne, down from a record $3,350 in July.
Russian nickel and aluminum giants
It transpires that the global crisis is not posing too much of a threat to Russia's own base metal producers.
MMC Norilsk Nickel, the world's biggest nickel and palladium producer, said at the end of October that it was trimming staff at its Moscow office by around 10% "to optimize cost structure". The company said employees at its industrial sites in Norilsk would not be affected, nor would its social and production programs in the region.
Norilsk Nickel so far prefers not to discuss what interests the markets most of all - it is still unclear whether production targets for this year have been revised. The company usually unveils its operating results for the first nine months of a year before October, and these usually contain production forecasts for the year. But Norilsk has still not released these figures. The last time it affirmed its full year production targets was August, when it said it was on track to produce 300,000-305,000 tonnes nickel, 415,000-420,000 tonnes copper, 3,020,000-3,070,000 ounces of palladium and 710,000-720,000 oz of platinum.
All that has emerged recently about the company's investment plans is that they "will be subject to certain adjustment."
However the company's Norilsk Nickel Australia subsidiary said last month that it was shutting down production and putting its Cawse unit in Australia into care indefinitely due to mounting industrial costs.
United Company RUSAL (UC RUSAL), one of the world's biggest aluminum producers, also claims to be unaffected by the global crisis. Chief Executive Alexander Bulygin said in comments on RUSAL's nine-month operating results that he was confident the situation where aluminum is trading at approximately $2,000 a tonne "provides an opportunity for companies to become even more competitive and enhance their efficiency by exploring new opportunities." "UC RUSAL intends to take advantage of this challenging time to strengthen its position in the mining and metals industry," he said.
RUSAL had been on the verge of forfeiting the blocking stake in Norilsk Nickel it purchased just this spring. The aluminum giant wasn't able to refinance the $4.5 billion syndicated loan from Western banks it used to finance the acquisition, a loan secured with the Norilsk shares. However, a loan from VEB solved that problem. RUSAL fully paid off the foreign banks and the Norilsk shares are now being held as security by state-owned VEB.
RUSAL decided this week to shut down production at Ukraine's only aluminum smelter, Zaporizhiya (ZAlK), citing high electricity rates. ZAlK, which has capacity to produce about 100,000 tonnes of primary aluminum annually, estimates it will have a loss of $10 million for this month alone, as production costs will hit $3,441 per tonne while the price of aluminum is $2,000.
RUSAL also needs to tackle problems with paying electricity bills at a number of its Russian smelters. Electricity distributor Kolenergosbyt has said that RUSAL's Kandalash Aluminum Smelter has asked to split up the standard advance payment that is usually made in October into three instalments and pay it by November 17.
In addition, last week MRSK Siberia said RUSAL was holding up payments. The electricity distributor's general director, Alexander Antropenko said RUSAL owed about 200 million rubles.
"There is in fact a delay, but we cannot take any action yet. Under the law, about two months must pass for this from the time of the delay. Right now the delay is about two weeks," Antropenko said.
RUSAL has denied the claims being made by the utilities, but has not provided any details.
RUSAL has also asserted that it does not plan to reduce production in light of the crisis, or to revise its investment program.
Technical tin default, copper and zinc
Novosibirsk Tin Combine (NOK), Russia's tin monopoly, failed to fulfill a put option on its series-2 bond issue on October 2, in the first technical default among Russian metals companies.
Bondholders presented 346,890 bonds with face value of 1,000 rubles each for buyback. The company therefore technically defaulted on 346.89 million rubles, not including the coupon yield. NOK attributed this to "temporary difficulties with liquidity."
"Management is carrying out a set of measures to resolve the situation as quickly as possible and to honor the put option within a month," the company said on October 6.
NOK had been preparing to sell a number of non-core enterprises in order to honor its commitments to bondholders. "But the general financial crisis has set this process back and the transaction has not yet been completed," NOK said.
A source close to NOK management said the company still hopes to buy back the bonds in the near future. However, NOK head Alexander Dugelny was unavailable for comment.
The general director of Ural Mining and Metallurgical Company (UMMC), Andrei Kozitsyn said last month that the company did not plan to suspend or revise investment projects already being implemented, despite the financial crisis. The company is thinking about cutting administrative expenses, but has not provided details about the steps it plans to take in this direction.
Russian Copper Company (RCC) is one of the few to openly state that steps need to be taken to deal with the crisis. The company has announced it is completely suspending investment projects for 2009, and plans to optimize production costs and substantially reduce general business expenses.
Chelyabinsk Zinc Plant, which posted a net loss to IFRS for the first half compared to a profit a year earlier, has only said it is reconsidering its investment program, including the project to develop the Amur zinc deposit.
The world's biggest titanium producer, VSMPO-Avisma has so far avoided discussing the potential difficulties that the global financial crisis could lead to, but the company is reportedly planning to talk to the media next week about how it intends to deal with the crisis. In October, when the threat of the crisis was already obvious, the company said it would expand production capacity and by 2010 begin to steadily increase titanium output.
The information policies of nonferrous metals companies create the impression that everyone is waiting to see which of the majors will be the first to admit that the crisis has reached the sector after all, and that it is necessary to take serious steps to deal with the steep drop in world metal prices and demand, including in Asia.
So what exactly is Russia's nonferrous metals industry staying silent about and why is it afraid to speak?
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MMK not asking state for funding, is suspending investment projects
MOSCOW. (Interfax) - Magnitogorsk Iron & Steel Works (MMK) is not thinking of asking the government for funding and plans instead to seek a commercial loan, Vladimir Shmakov, financial director of MMK Management Company, told reporters on November 11.
"We're not looking for state funding in any form, only funding on commercial terms, including from VTB," Shmakov said.
An earlier report said MMK, one of Russia's biggest steel producers, was thinking of raising a long-term loan from the VTB Bank.
Russia's leading metals companies earlier prepared proposals for the government on measures of state support to the metals industry, MMK said in a statement on November 10, citing MMK vice president for strategic development and metallurgy Rafkat Takhautdinov.
The companies are proposing that measures be passed to introduce customs duties on several products to protect the...
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