Rusal acquires a stake in a Chinese alumina producer for $262 million

Rusal, which lost a significant part of its foreign alumina assets in 2022, decided to buy 30% in the Chinese alumina producer Hebei Wenfeng for $262 million. The company will be able to receive up to 1.45 million tons of raw materials per year from this plant, almost closing its current deficit for now. Last year, Rusal’s expenses for the purchase of imported alumina increased almost 2.5 times, to $1.85 billion.

Rusal announced the acquisition of a 30% stake in Chinese alumina producer Hebei Wenfeng New Materials Co. (HWNM). The capacity of the Chinese enterprise is 4.8 million tons, and Rusal will be able to receive alumina from it in proportion to its share. The transaction amount is expected (.pdf) at $261.6 million and may be adjusted based on HWNM’s working capital and debt at closing, but is not expected to exceed $349.2 million.

The deal will not lead to tension in the domestic alumina market in China, and Rusal will be able to almost completely close its current shortage of raw materials for aluminum production.

The Chinese alumina market may see a surplus of 120 thousand tons in 2023 and 380 thousand tons in 2024, writes Platts with reference to research agency Antaike. In 2022, Rusal produced 3.8 million tons of primary aluminum and 5.95 million tons of alumina. According to Platts, 1.95 tonnes of alumina produces a tonne of aluminum. Thus, Rusal’s alumina deficit, which the company must close through imports, amounted to 1.5 million tons last year, while under the HWNM deal, Rusal will be able to receive up to 1.45 million tons. However, Rusal’s demand for alumina will grow – the company is building a plant in Taishet with a capacity of 429 thousand tons of aluminum per year, the first stage of which was launched at the end of 2021.

The purchase of a plant in China is a forced decision for Rusal given the loss of key raw material assets located abroad in 2022. Rusal produced 63% of the alumina it used at foreign assets, which included the Nikolaev Alumina Refinery in Ukraine, which the Russian company will join in 2022 lost access. In February 2023, the High Anti-Corruption Court of Ukraine nationalized the plant, which provided 20% of the company’s alumina production. Rusal also lost potential supplies from Australia, where it owned 20% in the Queensland Alumina enterprise (the main shareholder is Rio Tinto). Australia in March 2022 announced ban on the export of alumina and aluminum ores to the Russian Federation.

Rusal partially replaced the lost volumes with imports from China: according to Chinese customs, alumina exports from China to Russia reached 805.2 thousand tons in the first nine months of 2023, which is 22.2% more than last year .

According to RBC, the purchase of alumina in China and other Asia-Pacific countries is carried out at spot prices with 100% prepayment. At the same time, Chinese legislation does not allow the return of VAT on alumina exports, which created losses of 14 billion rubles for Rusal. According to the company’s report, the cost of sales of aluminum increased in 2022 by 30.2%, to $10.77 billion, including costs for the purchase of alumina soared by 149.3%, to $1.847 billion due to rising prices and an increase in the volume of purchased raw materials . Now a ton of alumina in China, according to Platts, costs $337, while a ton of aluminum on the LME costs $2,176 thousand.

Senior analyst at the Sinara investment bank Dmitry Smolin believes that Rusal will buy alumina at HWNM with a slight discount to spot prices. The plant is located near a port, so logistics should be relatively inexpensive. In addition, Rusal will be able to receive profit in the form of dividends from the enterprise.

In the future, Rusal intends to more radically solve the problem of dependence on imported alumina by building an alumina plant in Ust-Luga with a capacity of 4.8 million tons, where it will be able to supply bauxite from its enterprise in Guinea. The project, announced at SPIEF in June, is estimated at 400 billion rubles, the first stage of 2.4 million tons is planned for commissioning in 2028, the second in 2032.

Evgeniy Zainullin