YEAR IN REVIEW: Nonferrous metals waiting for a thaw
MOSCOW. Jan 9 (Interfax) - The situation on the nonferrous metals market has for the last few years recalled a frozen lake, where prices that stubbornly refuse to rise are the unbreakable crust of ice and producers are the fish under it trying to survive. However, one of the inhabitants of this lake feels quite comfortable despite the cold.
Aluminum
Aluminum prices kept the pressure on producers of the metal throughout almost the whole year. The price of aluminum on the London Metal Exchange dropped from an average of $2,177 per tonne in the first quarter of 2012 to $1,918 in the third. The situation improved slightly in the fourth quarter, when the average price was $2,000.
A price of $2,000 per tonne is the breakeven point for about 20-30% of the world's primary aluminum producers. The closure of plants in Europe, North America and Australia led to a reduction of production. However, the decline in production was fairly sluggish and did not do much to push up prices, analysts said.
"There was some reduction among more disciplined players, but big producers in Russia and China did not reduce volumes," VTB Capital analyst Nikolai Sosnovsky said.
In Russia, there was no substantial reduction of inefficient production due to the pressure of social issues, as the authorities tried to preserve jobs in company towns.
It is thought that China did not shut down loss-making aluminum production facilities for two reasons. First of all, so as not to hurt GDP figures ahead of a change in the country's leadership. Secondly, the country sees aluminum as a strategic resource and expects that today's excess capacity will be needed to meet future demand, Uralsib Capital analyst Valentina Bogomolova said.
In addition to excess capacity, there were record high stocks of aluminum in 2012. These stocks were mostly used as collateral on financial transactions and were not available to end users, so buyers of physical metals sometimes even faced shortages. This, in turn, increased the premium that consumers pay for physical delivery of the metal.
"Premiums remained fairly high the whole year and to some degree this helped producers to at least make money on such LME prices," Sosnovsky said.
Bogomolova said that in 2013 "the market will above all look for a sign from China, from producers. In addition, the whole metallurgy industry is waiting for China to announce stimulus measures, not just in broad terms, but specifically."
Sosnovsky said that for now there are fairly good signs coming from China in the form of record electricity production, sound automobile production and a revival in construction.
"The latest figures from China inspire some optimism, if this trend will take hold and develop [in 2013] then one can expect aluminum prices of $2,200-$2,300 in the second half of 2013 at a stable level," Sosnovsky said.
However, he said, the situation on the market will depend on what producers do and how disciplined they will be in responding to these low prices with an adequate reduction of output. If growth in China resumes, the appetite for risk increases and investors show an interest in buying aluminum contracts, then even with the industry not quite balanced prices on the LME will climb. If not, then this situation could continue for a fairly long time.
Uralsib Capital believes that aluminum prices in the first quarter of 2013 will remain at the current level of about $2,000 per tonne. "Volatility will continue. There might be more of a recovery in the second half of the year. The price will be slightly above $2,000, maybe $2,100," Bogomolova said.
Rusal to get help from Norilsk Nickel
For Rusal, the world's biggest aluminum producer, a clear breakthrough in 2012 came with the end to a years-long feud at mining giant Norilsk Nickel.
Norilsk Nickel's principal shareholders, Rusal and Interros, as well as Roman Abramovich's Millhouse signed an agreement in early December that is supposed to put an end to the shareholder dispute at the world's largest nickel and palladium producer.
Rusal will sell Millhouse a 2% stake in Norilsk Nickel for about $620 million. Norilsk Nickel might also pay out dividends of $2 billion for 2012 and $3 billion annually for 2013 and 2014.
Following the cancellation of Norilsk Nickel quasi-treasury stock, Rusal will control 27.8% of shares in the company, so it can expect to receive about $560 million in dividends for 2012, Sosnovsky reckons. This is about the same amount as Rusal is due to pay in interest on its multibillion-dollar debt.
In addition, Rusal can use the proceeds from the sale of the Norilsk shares to pay down principal debt in the second half of 2013. The company is due to pay $900 million.
"They've already found $620 million, they need another $280 million. Theoretically, with better prices, as we expect, the company should be able to earn this itself, but even if it doesn't this already won't be that hard to refinance," Sosnovsky said.
Rusal's net debt stood at $10.7 billion at the end of September, down from $11 billion at the beginning of 2012.
On the whole, Rusal's debt problem has not gone away in strategic terms, but tactically, for 2013, it has been more or less resolved. Looking ahead, the company will wait out the bad times and see what happens toward the end of 2013, Sosnovsky said.
The past year, however, did not bring a resolution to the corporate dispute at Rusal itself. One of the company's shareholders, Sual Partners, which represents billionaire Viktor Vekselberg and his business partners, has been openly feuding with Rusal's principal shareholder and CEO, Oleg Deripaska since the early spring of 2012.
In March, Vekselberg announced he was stepping down from the post of Rusal board chairman and leaving the board altogether in protest over the actions of management. Sual Partners has launched a number of lawsuits against Rusal, the most visible of which was a case in London against Rusal and commodities trader Glencore. The lawsuit concerns long-term primary aluminum and alumina supply contracts that Rusal signed with Glencore, which Sual estimates are worth $47 billion. Sual claims the contracts were approved unlawfully, in violation of the veto held by Sual Partners under the shareholder agreement.
Another point of contention on the part of minority shareholders is dividends. Bogomolova reckons Rusal will not start paying dividends in the next three years because under its covenants with creditors this is only possible after the debt/EBITDA ratio is reduced to 3. It is currently at about 10.
Rusal, despite its relatively low aluminum production costs, generally had a difficult year. The company posted a net loss of $117 million in the first nine months of 2012 compared to a profit of $1.2 billion in the same period of 2011.
Against the backdrop of external challenges, Rusal continued to work on itself and continued to modernize casting facilities throughout the year. The company plans to increase the share of high value-added products to 55% of total production by 2016 from 40% in the third quarter of 2012. The company also continued construction on new production facilities - the Boguchany and Taishet aluminum smelters.
Rusal believes that the fair price for aluminum in 2013 should be in the range of $2,200-$2,300 per tonne. The company also believes that the premium to the aluminum price will continue to climb until the end of the first quarter of 2014. Rusal first deputy CEO Vladislav Solovyev said in the fall that growth of warehouse stocks and critically low prices are already a thing of the past, but that the situation on the market would not improve immediately.
"Rusal has long cut everything that could be cut with broad strokes, more delicate things in terms of optimizing costs are left, so the company's earnings in 2013 already depend more on the external market and what aluminum prices will be like rather than on the company itself," Sosnovsky said.
However, considering Russian specifics, delicate cuts alone will not do. Rusal cannot close unprofitable and obsolete plants because job cuts will cause social unrest in company towns. The government immediately intervenes in such issues. A clear example of this was the Bogoslovsk Aluminum Smelter (BAZ). The company had barely announced plans to close inefficient pot rooms at BAZ and a state commission was immediately formed, and rallies and hunger strikes began. Ultimately, the government provided a low electricity rate to keep part of the aluminum facilities running until 2014 and a cheap loan to modernize the smelter.
Zinc hoping for domestic demand
The main problem in 2012 for all metals, including zinc, was the drop in prices. Zinc prices on the LME fell 14% compared to 2011, to $1,900 per tonne. Price fluctuations depended a great deal on economic growth in China, which was a source of bad news for seven months of the year.
"The average zinc price in 2012 was less than $2,000 per tonne. If it will be higher than this level [in 2013] that will be pretty good," Nord Capital analyst Roman Tkachuk said.
Russia's biggest zinc producer, the Chelyabinsk Zinc Plant (CZP) handled the slump in prices well and will manage to close 2012 with a profit.
In 2013, CZP plans to increase production of zinc and zinc alloys to 165,000 tonnes from a planned 160,000 tonnes in 2012. The plant hopes to sell 120,000 tonnes of this on the Russian market independently and sell only 45,000 tonnes under a processing contract with Urals Mining and Metallurgical Company (UMMC).
The plant expects revenue to Russian Accounting Standards to grow to 11.4 billion rubles in 2013 from a tentative 10.81 billion rubles in 2012.
CZP also expects an improvement in the situation with supplies of raw materials, almost all of which it plans to get from the Ural region and Kazakhstan. It does not plan to import from outside the CIS. In 2012, expensive imports from outside the CIS totalled about 20,000 tonnes.
Nonetheless, in putting together its budget for 2013 CZP held to a pessimistic scenario based on a zinc price of $1,800 per tonne on the LME.
"We hope that GDP growth in China will pick up, that new drivers of growth will be found. If demand recovers in China, the plant will find itself a market. If it doesn't manage to sell its product on the domestic market, they'll find other options, such as Asian countries," Tkachuk said.
Many analysts believe that the zinc market could move from oversupply to undersupply in 3-5 years. In light of this, CZP's announcement of plans to expand zinc production to 200,000 tonnes per year by the end of 2016 appears timely.
"If new serious shocks, a new crisis are avoided, then this program is quite realistic. The question is in the possible markets," Tkachuk said.
Copper still comfortable
Prices for copper, despite the shortage of the metal on the market, also fell in 2012, dropping about 9% to $8,000 per tonne.
However, despite the slump in prices copper producers remained quite comfortable in 2012, as the average production cost in the industry is $2,500-$3,000 per tonne.
"The main negative news for copper was that China lowered its GDP forecast, as China consumes more than 40% of global production. Consequently, this set off a sell-off of this metal. But since there is a shortage of copper in China, prices for the metal recovered very quickly," BCS analyst Oleg Petropavlovsky told Interfax.
The drop of 9% is the best result for the year among all nonferrous metals, which fell much harder.
On the demand side, copper mirrors GDP growth. Demand for virtually any type of resource comes down to what is happening in China.
"If we believe that in China everything has begun to more or less rise, that they will grow by 7% or more for several years, then copper could look very decent, there could easily be a shortage on the market," VTB Capital's Sosnovsky said.
BCS forecasts that the copper price in 2013 will be at the 2012 level of about $8,000 per tonne.
However, problems in the sector are not only related to prices. There are more issues concerning production. Operations at copper mines in South America were shut down in 2012 due to earthquakes. New capacity is not being launched as many had planned. The copper grade is falling at major mines, production costs are growing, and the capital cost of projects is increasing exponentially.
"Copper projects express a certain essence of all the problems of the mining industry, starting with the awful inflation of operating and capital costs and ending with resource nationalism. Most copper projects are located in Africa and South America, where national interests are strong. Risks are growing everywhere," Sosnovsky said.
Russia's top three copper producers - Norilsk Nickel, Ural Mining and Metallurgical Company (UMMC) and Russkaya Mednaya Kompaniya (RMK) - should be felling very good at current prices, Petropavlovsky said.
Sosnovsky said Russia's copper industry has not seen a major leap forward yet. The only major green field project currently being implemented in the country is RMK's Mikheyevskoye porphyry copper deposit.
"This is a very big project. Perhaps not very profitable due to relatively low grade, but there haven't been any copper projects of such scale in Russia for a long time," Sosnovsky said.
The project to develop this deposit involves the construction of an open-pit mine with capacity of up to 18 million tonnes of ore per year, a plant to produce copper concentrate, as well as auxiliary and external infrastructure. The mine and plant are scheduled to launch in the fourth quarter of 2013. RMK estimated the cost of the project at over $780 million.
RMK also plans to begin financing in the first quarter of 2013 for a $1 billion project to build a mine and processing plant at the Tominskoye copper deposit. This mine and plant will have capacity to process 28 million tonnes of ore per year. Commercial mining is scheduled to begin in December 2014.
RMK intends to expand production capacity to 300,000 tonnes of copper in the cathode equivalent by 2015.
More distant projects include Norilsk Nickel's construction of the Bystrinsky mine and processing plant by the end of 2016. Production could amount to 62,000 tonnes of copper in concentrate annually. Norilsk Nickel planned to produce 364,000-370,000 tonnes of copper in 2012, including 355,000-360,000 tonnes in Russia and 9,000-10,000 tonnes abroad.
Udokan in Trans-Baikal Territory, Russia's biggest copper deposit and one of the largest in the world, still has the most elusive future.
"This project is still very vague and uncertain. There are very many questions there, starting with the huge capital cost, which is already estimated at $6 billion-$8 billion, and could actually turn out to be far higher. Ending with the fact that there isn't even a feasibility study yet, and such projects take years and years. And it's not very clear whether Metalloinvest will after all want to plough such huge amounts of money into this business with huge production risks and the risks of big investments in Russia," Sosnovsky said.