Yury Adno

    The aluminum industry was set up in Russia, first and foremost, for military production to be ensured. The aerospace complex accounted for over 30 % of home consumption of this metal. Now, due to well-known reasons, this figure fell more than five times. However, in the conditions of total economic decline of the 90s this sector increases production output step-by-step, with the greater part oriented to the foreign market. As of today Russia is surpassed in the world only by the USA in primary aluminum and ranks first in exports.
Regardless of positive dynamics of development and relative economic stability, the Russian aluminum industry failed to overcome internal imbalances. The main of them are a shortage of high-quality mineral materials, a shift to primary metal with a limited demand for finished products, wear and tear of an essential part of production facilities, and, as a result of it, high costs, higher ecological danger and comparatively low competitiveness of Russian aluminum in the market.

Raw materials were always in shortage
A shortage of bauxites and alumina has been an Achilles’ heel of the Russian aluminum industry since its establishment. For all the years elapsed no adequately large bauxite deposit competitive in ore quality and full-scale mining conditions was developed in the territory of Russia. The raw materials shortage caused an imbalance between main conversion stages. It can be vividly demonstrated with the help of an indicator showing the percentage of Russian enterprises in world facilities. For example, it is 14 to 15 % in aluminum production, 5 to 6 % in alumina production, with a little more than 3 % in bauxite mining. The Russian portion in the world reserves of this raw material is even lower: only 1.4 % (below 1 % in proved reserves).
The production imbalance intensifies the territorial disunion of main mining and processing facilities. Over 80 % of bauxite deposits and about 70 % of alumina production facilities are located in Ural and North-West while more than 80 % of aluminum is made in Siberia near comparatively cheap electric power sources.
Up to now Ural where bauxites have been mined for over 60 years is the main raw materials base of the Russian aluminum industry. Here the North Ural Bauxite Mine (SUBR JSC) producing 3.5 million tpy of ore and South Ural Bauxite Mines (YUBR JSC) delivering around 300,000 tpy of ore are in operation. Apart from them, a small quantity of low-quality bauxites is mined in the European part, in particular, in the North Onega Mine (the Arkhangelsk Region).
By the estimates of geologists, the raw materials of SUBR will be sufficient for 35 to 40 years of future operation with today’s mining output. The ore is mined by the capital-intensive underground technique from a depth of 800-1000 m in complicated geological conditions which has a drastic negative effect on the economic indicators of the operation. To replenish the reserves, large investments are demanded which in turn is a burden on the prime cost of the run-of-mine ore. Other items of operating costs (power, transport, ecology) must be added. In the outcome, alumina from North Ural mines loses price competitiveness, and big Russian consumers (Siberian aluminum producers) prefer import supplies.
The mining of bauxites in South Ural (YUBR) has no future prospect because of high costs, depletion of the deposit and low quality of the ore. In April 2002 a shareholders’ decision stating a voluntary liquidation of YUBR and a termination of operation of the mine was announced.
Russia has at its disposal huge deposits of alternate ores with lower content of aluminum – nephelines and alunites. Comprehensive technologies will be required for the organization of their full-scale processing to alumina. The biggest enterprise of this type is situated in the Krasnoyarsk Krai (Territory). It is the Achinsk Alumina Plant (AGK). The technical & economic efficiency of these production operations depends a lot on the market sales of by-products (soda, cement, etc.).
In total, the Russian aluminum industry is provided with own raw materials only for 35 to 40 % and therefore remains highly dependent on imports of alumina.

Tolling: pro and con
In the course of reforms the aluminum industry faced complications inherent of the Russian economy. Besides, its specific problems were exaggerated. The raw materials base became narrower. After the collapse of the USSR, big alumina suppliers (the Nikolayev Alumina Plant, Ukraine, and the Pavlodar Alumina Plant, Kazakhstan) turned into foreign partners. A dramatic reduction of military orders and a virtually full stoppage of the aircraft industry decreased domestic demand to its lowest limit. The loss of the home market was balanced by export supplies of primary aluminum which accounted for 85 % of the total output on the average.
It was in this period when tolling received wide acceptance. It was proposed by Trans World Group as a variant of decision of the problem of the shortage of raw materials and working capital for their purchase. A plant working under the tolling pattern is not the owner of the products and that is why is not engaged in the market, concludes no sale & purchase deals and pays no taxes connected with export-import operations. The plant only renders services in processing of raw materials (alumina in this case) supplied by the customer who is, as a rule, a foreign company. The customer makes a preliminary estimation of processing cost and inputs a profit specified by the contract. As the metal produced is not intended for home consumption, it is under customs control. Here the customer has a right to use raw materials purchased in Russia in the case of so-named «internal» tolling. The pattern of «internal» tolling, which afforded an economic counterbalance between Russian (for the most part, Uralian) and foreign suppliers, was introduced as a temporary measure initiated by Uralian plants, approved by the resolution of the Government in 1994 and valid till November, 1999.

In the middle of the 90s, the overall tolling supplies amounted to around 50 % of total consumption (see the table). Such a large scale of participation of foreign companies in the production cycle limited the possibilities of the Russian management in strategic planning and handling of funds. In a way, Russian plants functioned as a preparatory stage for aluminum industries of other countries.
Tolling was an enforced measure and involved different assessments made by specialists. But the matter was not restricted to debate alone. In autumn, 1999 an unprecedented campaign was engineered on TV and in the press, which was aimed at the banning of this kind of business termed as a method of «robbing» Russia. Similar slogans decorated the streets of Moscow and other cities. Naturally, ordinary TV audience and readers were unaware what «alumina, tolling» meant. It attributed absurdity to this action. Meanwhile, its organizers reached their aim: the practice of processing Russian raw materials under the pattern of «internal» tolling was terminated which allows a conclusion to be made regarding a serious failure of the Uralian group in competitive fight.
In general, the application of «give-and-take» raw materials assisted in stable operation of aluminum plants, strengthened their presence in foreign markets, ensured hard currency incomings and widened investment possibilities for modification of technologies and improvement of product quality. In complex with favorable external factors, especially, the ruble devaluation in 1998, it helped the Russian aluminum industry to withstand the complicated period of the 90s virtually without losses.

R E F E R E N C E Russia is one of the main world importers of alumina, with annual purchases of about 3.8 million tons. The domestic production of alumina will increase from 2.8 to 5 or 6 million tons per year when the Sredne-Timansky bauxite mine reaches its full capacity, an alumina plant of 1.2 million tons per year is built by 2008 based on this mine and the capacity of the Bogoslovsky Aluminum Plant is expanded as proposed. It will greatly change the situation in the world alumina market.

Key players
On the boundary of the centuries key players were identified in the Russian aluminum market. Above all, it is Russian Aluminum formed in 2001 with the participation of Sibneft in the process of consolidation of assets of the leading Russian producers of primary aluminum, alumina (among the, foreign ones) and aluminum products. Russian Aluminum accounts for over 70 % of primary aluminum made in this country. The company incorporates the world largest Bratsk and Krasnoyarsk Plants, Novokuznetsk and Sayany Aluminum Plants, semi-products and various products makers as well as. Lately the company extended its business into the field of automobile plants. Russian Aluminum does not have bauxite mines in the territory of Russia but is active in developing this line of activities abroad.
Another large amalgamation is Siberian & Uralian Aluminum Company which was substantially expanded in 2002 due to the acquisition of a shares stock of Transkonsaltgrup. In this way a vertically-integrated structure of SUAL-Holding was founded. At present this group mines 90 % of Russian bauxites, makes about 60 % of alumina and 25 % of aluminum. The holding owns the very promising Sredne-Timansky bauxite deposit in the north-west of the European part of Russia, main alumina producing plants, a primary aluminum producing group comprising four plants, a big block of finished products manufacture facilities and several plants for making special products – powders, silicon, cryolite, abrasives, etc.
The formation of large integrated companies may be considered a logical response to the structural changes in the world aluminum business where the consolidation of capital, resources and production facilities takes place. The appearance of Russian holdings in this market became a noticeable event. It is enough to note that Russian Aluminum is now the world second in capitalization (by foreign estimates, $8.4 billion) below only Alcoa (about $26 billion).

Two companies – two strategies
In Russian conditions the targets of the corporate strategy deal with the solution of raw materials problem, reliable power supply, transportation of raw materials and products, expansion of value-added products, modernization of production facilities. Despite outward similarity, the strategy of Russian aluminum companies has its peculiarities.
Even now SUAL-Holding is one of a few companies in the world which are balanced in capacity of main conversion stages. Alongside it, this group is active in strengthening its raw materials base by step-by-step commissioning of the Sredne-Timansky mine. Approximately 800,000 tpy of bauxites are mined here. Large investments are put into the modernization of rolling and cable plants, due to which for the last two years the company improved the structure of its exports by increasing the share of value-added products from 5 to 18–20 % and enlarging the supplies of these items to home market. The main problems of SUAL-Holding are connected with a search of investments for modernization and development of the main conversion stages – alumina and aluminum.

R E F E R E N C E The Achinsk Alumina Plant was put on stream early in the 70s. The raw materails are nepheline urthites, the concentrate contains maximum 30 % Al2O3. The design capacity of the plant is 900,000 tons of alumina, about 4 million tons of cement and over 600,000 tons of soda products per year. The high prime cost of alumina made by baking is partially offset by additional production of soda, potassium carbonate, cement and gallium.

Russian aluminum selected a somewhat different way. Having a high-capacity aluminum complex in its structure, the company directed a considerable part of finances to the purchase of machinebuilding plants. At present Russian Aluminum controls the Gorky Automobile Plant (GAZ), the Ural Automobile Plant (UralAZ), the Abakan Carriage Works, the Lvov Autobus Plant, a road-building equipment plant, etc. Such diversification of business activities seems to be rather risky because all these plants require radically varying management and marketing as well as huge investments before bringing a due economic pay-off.
The differences in the strategy of these two aluminum companies are especially evident in the provision with raw materials. SUAL-Holding connects its prospects with the development of the Sredne-Timansky bauxite mine (STBR) which is to reach an annual output of 2.55 million tpy of bauxites at the Russia’s lowest level of prime cost by 2005. In complex with the operating North-Ural bauxite mine (SUBR), it will fully meet the requirements of the alumina production operations and even afford an expansion of output of saleable alumina for market.
By preliminary estimates, the reserves of the Sredne-Timansky deposit will be sufficient for at least 50 to 60 years of operation. By 2010-2012 in this region SUAL-Holding plans to establish an integrated complex enclosing an entire production cycle from mining of bauxites till output of products from aluminum and its alloys. The complex will comprise an alumina plant of 1.2–1.5 million tpy, a primary aluminum plant (600,000 tpy), an aluminum semi-products plant (250,000–270,000 tpy). The implementation of the project with an investment cost of $2 billion depends on the scheme of capital attraction. For the time being, HATCH Kaiser Engineers, an engineering company, is preparing a feasibility report for the project of this unique complex.
Russian Aluminum abandoned the participation in the joint development of the Sredne-Timansky mine as, according to the information of Deputy General Director Aleksandr Lifshits, it intends « to own self-sufficient raw materials resources». «We want to have raw materials of our own», Aleksandr Lifshits clarified, «and we are advancing towards it in various countries in the world». The company already invested around $40 million in the development of Guinea’s bauxites. Russian Aluminum counts on the expansion of its participation in the operation of one of the leading mining companies in Guinea (Societe des Bauxites de Kindia) with an annual output of 4 million tons and carries on negotiations regarding receiving a concession for the development of one of the world largest deposits – Dian-Dian. The reserves of raw materials here are estimated at 400 to 1000 million tons.
The alumina production operations of Russian Aluminum are being developed through modernization and expansion of the production base of two own enterprises – the Nikolayevsk and Achinsk Alumina Plants.
Time will show whose strategy is preferable. Nowadays the choice of SUAL-Holdings seems to be more reliable because all stages of production cycle are balanced, from mining of raw materials till sales of aluminum semi-products. Regardless of huge investments in the construction of the new alumina & aluminum complex, this ambitious project is also successfully incorporated into the general strategy of the corporate development.
In our opinion, the development strategy of Russian Aluminum features several weak points, first and foremost, owing to a large number of capital-intensive production links of relatively comprehensive machinebuilding profile available in the corporate structure. This structure is rather cumbersome and difficult in management. This instability was partially exposed in the conditions of the last year decline in the aluminum industry when, because of lower profit and hard currency incomings, the company had to suspend the implementation of a majority of its investments programs and to reduce manpower in certain divisions. In the near future a separate and comparatively independent machinebuilding holding is likely to be singled out in the corporate structure.