UC RUSAL and China in the global aluminium industry: potential for co-operation

CRU 2008

September 22, 2008

Sergey Belsky, Acting Director of Sales and MarketingUC RUSAL

2

0

20

40

60

80

100

2001 2006 2007 2009 2015 2025

•Need for New Supply with Risk of Scarcity (MMt)

•Demand for Aluminium By Region (MMt)

20

49

29

40

2006 2015 2006 2015

Emerging Economies Developed Economies

China

India

ROW

NAFTA

WesternEurope

DevelopedAsia

11%

Project/limited likelihood

Projects/high likelihood

Secure/net additions

Capacity needed to serve GDP-based demand*

Capacity needed to serve application-driven demand

4%

4%

Bullish industry fundamental seen by experts

• Global aluminium supply is not catching up with the rapid demand growth.

• Demand in developing markets is expected to be markedly higher then in developed markets.

• BRIC aluminium demand is forecast to grow at 11% CAGR through 2015.

Source CRU, Global Insight

GDP $000 per capita

Aluminium Consumption (kg per capita)

Aluminium consumption per capita vs GDP per capita

U.K.

MexicoBrazil

Russia

India

China Thailand

Venezuela

FranceSw eden

AustraliaItaly

USAJapan

Taiw an

CanadaGermanyS. Korea

0

10

20

30

40

50

60

0 10 20 30 40 50

Source: McKinsey

3

7092

111148

208

275

328

0,430,370,350,350,35

0,36

0,80

0

100

200

300

400

2000 2001 2002 2003 2004 2005 20060,3

0,5

0,7

0,9

240

451

356

181

50

100

150

200

250

300

350

400

450

500

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07

Zinc CopperSteel Aluminium

Relative Performance for Copper, Zinc, Steel and Aluminium (Rebased to 100 as of January 2000)

China’s net imports and price – iron ore lump (a)

Source: Bloomberg

(a) Net imports of seaborne iron ore per CRU; Prices FOB CVRD lump

Sources : CRU, Datastream

Recent commodity price increases are partially driven by China’s growing role as a net importer

• Despite 2006 price rises, Aluminium prices have not kept pace with Copper, Zinc and Steel Prices

• As Copper and Zinc prices have risen, Aluminium has become an increasingly attractive substitute, further driving demand growth

• Steel prices have also out-performed Aluminium (albeit to a lesser extent than Copper), further stimulating demand for Aluminium as steel consumers look to Aluminium as a substitute

In the long term demand will double

4

• Accelerating urbanization and industrialization in China (2001- 07):

– 90 million people moved into cities, 250 million expected to follow by 2025

– GDP per capita grew at 9.6% p.a.

– Spend on non-residential construction grew at 14.2% p.a.

• Faster development in China today than in developed world in 1960s and 70s

• Today's application technologies are more Aluminum intensive than those applied in 1960s and 70s in the developed world

• Decoupling of demand growth from GDP also occurring for other metals

15.6

GDP per capita

17.7

9.6

Aluminum consumption per capita

Finished steel consumption per capita*

6.75.9 3.4

World

China

Annual growth rates, 2001 - 2007Percent

*2001 - 2006 CAGRSource: Global Insight, IISI, McKinsey

China is the main engine of demand growth

5

Global Aluminium Demand, MMt

7.5 16.46.0

8.111.0

15.412.0

16.29.8

27.7

2.65.1

2006 2015

RoW South America Developed AsiaWestern Europe NAFTA China

15%

41%16%

5%

11%

7% 5%

12.3

3.4

3.83.47.89.1

CAGR 2006-15, %

Transport

Construction

Electrical

Packaging

Engineering/ machineryConsumerdurablesOther

China

NAFTA

W. EuropeDeveloped AsiaSouth AmericaRoW

10.0

14.4

13.7

8.2

13.2

9.4

8.2

• China is the key growth market compared to other regions of the world

– China’s share in global consumption is expected to increase to 31% in 2015 from 20% in 2006

• Construction*

– non-residential construction outpacing GDP growth by 7%

– aluminum intensity of total construction increasing by 9% annually

• Transportation*

– number of cars produced increasing by 24% annually

• Electrical*

– aluminum intensity of transmission line network additions increasing 19% annually

• Engineering*

– aluminum intensity of engineering increasing 19% annually

Source: McKinsey

**

** Including primary and secondary aluminium* Based on 2001-07 data

18%

35%14%

7%

10%

9%7%

China converge with world’s aluminum consumption patterns

6

Growth in aluminium production and consumption in China is unprecedented

-10000

-5000

0

5000

10000

15000

20000

25000

30000

35000

2001 2002 2003 2004 2005 2006 2007 2008* 2009* 2010* 2011* 2012* 2013* 2014* 2015*

Production

Consumption

Balance

Aluminium Production vs. Aluminium Consumption in China (thousands tonnes)

* Forecast

Future of demand looks bright but production can be constrained.

7

Advantages• Low capex and short lead times• China’s aluminium industry is competitive in terms

of low capex costs and resulting very quick payback period compared with aluminium smelters elsewhere in the world

• It takes 12 months to build 250 kty smelter with 320 Ka pots while it could take 3-5 years in other regions

• There are about 5,8 mtpy new aluminium smelting projects under construction to be finished by the end of 2009. More than 5 mtpy of this capacity is located in major coal producing areas. In addition there are another 2,4 mtpy of planned and proposed projects

• China with its own technological and construction resources may develop external assets building smelters and exploring bauxite deposits worldwide

Disadvantages• High cash costs. Over 70% of Chinese production

is based on coal-generated energy• Low capex are under challenge (higher input costs

for energy, cement and steel, higher equipment costs, higher prices for aluminium bus bars). Construction costs recently have been increased by 30% and expected to increase by 80% according to McKinsey

• Lack of raw materials base. China depends on imported bauxite for 43% of its alumina refining needs

• Energy deficits and environmental problem – 61% of the smelters have captive power

stations– 21% is state owned with cheaper power– 17% individual investment without secure

supply of power

Capacity and production growth will remain strong over the next few years but further growth of primary output may be constrained. Undersupply may emerge in the beginning of the next decade

Future development of primary aluminium production in China

8

• Capacity expansions are likely to be held back by increases in factor costs (energy, labor, alumina, including price effects on alumina, linked to expected higher LME)

• purchased energy prices are expected to increase further in the EU and the US, driven by increasing CO2 cost

• “Stranded” power locations are likely to disappear and low-cost opportunities will no longer be available

• Construction costs have been increasing dramatically during recent years and are expected to grow further

• China is increasingly vulnerable to the impact of global “scarcity factors”

100

40

25

n/a

40

Middle East

South America

Africa

Southeast Asia

China

India

2,500CIS

3,800

4,000

4,000

n/a

2,200

n/a

7,500

5,700

3,900

3,900

3,400

4,500

4,900

Recent projects2000 - 07

Announced projects 2008 - 15

IncreasePercentRegion

80

n/a

Source: McKinsey

Construction cost, USD per ton of capacity, USD/mtpy, real 2007

1 7501 6401 8901 9302 1501 920

2 3502 500

NAFTA WorldEurope China

Average cash cost of existing capacity 2007 - 2015, USD/mtpy real 2007

2007

2015

Rising Costs Are Slowing Down the Growth of Aluminium Industry Globally

9

• UC RUSAL existing and prospective capacity is concentrated in direct proximity to China and key Asian markets

• UC RUSAL utilizes environmentally-friendly, sustainable and plentiful supply of hydroelectric power supply in Siberia

• UC RUSAL has alumina-long position sufficient to accommodate all planned capacity expansions

Breakdown of Aluminium Sales by Geography 2008А (by USD mln)

23%

23%

8%46%

Western Europe

CIS

Asia

USA

By 2015 UC Rusal expects to supply 50% of its output to Asia, of which 70% is projected to China

BRAZ

IRKAZ

KRAZ

SAZ

NKAZ

BEMO

Taishet

Other Asia

1.5 0.3demand supply

China**

15.8 15.0

+11.9 +6.6

demand supply

Developed Asia

3.80.0

+0.1

demand supply

2008*

2015 additions*

Source: Brook Hunt, McKinsey, UC Rusal

Siberian smelters will provide up to 83% of UC Rusal output by

2015

* Primary aluminium

** According to McKinsey Chinese demand for aluminium in 2015 will be 27.7 MMtalong with additional smelting capacities of about 6.6 MMt

UC RUSAL a natural partner for China as strategic supplier

UC Rusal - Siberia

3.5

+1.5

production

10

Source: Hatch/SRK Technical Report, UC RUSAL

(a) Aluminium production (2006), excluding Zaporozhye (0.1mt) (Ukraine) and Kubikenborg (0.1mt) (Sweden)

UC RUSAL’s principal electrical power sources

SiberiaPrincipal source of power:

Hydro

European RussiaPrincipal source of power:

Hydro / Nuclear

UralsPrincipal source of power:

Coal / Gas

83% 3.1mt (a)

9% 0.3mt (a)

8% 0.3mt (a)

UC RUSAL: Access to globally competitive power with majority from environmentally clean hydro sources

11

UC RUSAL has a unique asset base including proven bauxites reserves for over 100 years

6,2

3,9

1,9 1,7

0,9

-1,2

Chalco UCRUSAL

BHPBilliton

Alcoa (2) Rio TintoAlcan

NorskHydro

Net alumina balance 2007 (mt)(1)

Source: UC RUSAL, Annual reports

1) Considering a ratio of 2:1 between the production of aluminium and the use of alumina

2) Includes assets not held via AWAC (Alcoa World Alumina and Chemicals)

17.3 mt bauxite,4.9 mt

nepheline

* UC RUSAL 2007 aggregate attributable production

11.3 mt alumina

4.2 mt aluminium

Only ~ 2% of aggregated

revenue (2007)

(3)

98%

45%

30%

70%

2%

55%

UC RUSAL Alcoa Norsk Hydro

Primary aluminium Downstream

Aluminium peers – 2007 revenue breakdown

Mining * Refineries * Smelters * Downstream

3) Including 1mt of alumina purchased

Unique upstream focused integrated asset base

12

+ Over 2 million tpa by 2013

0

200

400

600

800

1000

1200

Krasnoyarsk Bratsk Khakass Irkutsk Kubal(Sweden)

Alscon(Nigeria)

Taishet BEMO

Pipeline of expansion projects to meet global aluminium demand

UC RUSAL aluminium production capacity expansion plans in thousand tonnes per annum

Greenfield projects

Brownfield projects

13

59006550

0100020003000400050006000700080009000

10000

North America

- 650(-1150 in 2015)

27001500

0100020003000400050006000700080009000

10000Latin America

+ 1200(+1200 in 2015)

1750500

0100020003000400050006000700080009000

10000

2350

4500

100020003000400050006000700080009000

10000

Africa+ 1250

(+1600 in 2015)Oceania+ 1900

(+1800 in 2015)

5600

8400

0100020003000400050006000700080009000

10000

Europe

- 2800(-4250 in 2015)

15000 14700

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

China

+ 300(-3350 in 2015)

4650

1000

0100020003000400050006000700080009000

10000

Russia and CIS

+ 3650(+5350 in 2015)

ProductionConsumption

1900

6850

0100020003000400050006000700080009000

10000

Other Asia- 4950

-5700 in 2015)

1950

4500

100020003000400050006000700080009000

10000

Gulf+ 1500

(+3400 in 2015)

Source; Brook Hunt, Q2, 2008, Antaike

World aluminium balance 2008 - 2015

14

Existing projects in China

• Linshi cathode plant in Shanxi province with annual capacity 15 000 tonnes. Rusal plans to increase capacity up to 25 000 tonnes

• Cathode plant in Baoguan, Taiyuan administrative district, Shanxi Province. The plant’s existing annual capacity is currently 9,300 tonnes of cathode blocks and the company plans to increase this to 20,900 tonnes by 2010.The total investment in the plant’s development is planned to exceed USD 20 million.

Current cathode producing capacity in China will

supply about 60% of UC RUSAL needs

Shanghai Rep.office

Linshi cathode plant

Baoguan cathode plant

Beijing rep.office

15

• In 2008 UC RUSAL and China Power Investments Corporation (CPI) signed a memorandum of understanding regarding future cooperation in bauxite mining, refining of alumina and aluminum smelting

– CPI is a major Chinese vertically integrated energy company (coal mining, power generation, aluminum smelting)

– Joint venture combining resources needed for aluminium smelting: bauxite mining and alumina refining in Guinea and hydroelectric power-based aluminium smelting in China

– Mutually beneficial cooperation: China’s access to raw material base in exchange for UC RUSAL’s large-scale presence in the Aluminium industry

• Bauxite and Alumina complex in Guinea• Proven reserves of 564 MMt of bauxites• Bauxite quarry with planned annual

capacity production of 13.4 MMt of bauxites

• Alumina refinery with planned annual capacity of 2.8 MMt

• Aluminium smelter of planned annual capacity not less than 500 kMt of aluminum in Qinghai province

• 2 potlines (270 cells each)• Pre-baked anodes plant• Electric energy from chain of hydro

power plants at Huang He river

UC RUSAL has a long-term strategic commitment to China and represents a perfect fit for the Chinese partners – both consumers and producers of aluminium

GuineaDian Dian

bauxite deposits

China

New Smelter project

Hydro power stations

UC RUSAL / CPI JV

Thermoelectric power stations

Nuclear power plants

MoU with China Power Investments

16

Platform for Growth

Scale & Global Presence

Low Cost Position

Balanced Portfolio/ Vertical Integration

Consolidation of World Class Know-How

World Class Management/ Corporate Governance

Financial Strength

�

16

UC RUSAL – A Platform for Growth

17

Corporate Headquarters13/1, Nikoloyamskaya str.,Moscow, 109240, RussiaPhone: +7 (495) 720 5170, 720 5171Fax: +7 (495) 745 7046www.rusal.com

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