China, the world’s largest aluminium market, is showing a serious com-mitment to improve efficiency in the country’s aluminium industry. These changes could play a pivotal role in the global aluminium market development, and unlock potential for a tighter cooperation between China and Russia in the ‘winged metal’ production.

The big and the growing

China is the world’s fastest growing economy. According to analysts’ es-timates, China is on track to surpass the US and become the largest world economy by late 2020s. Over 46% of China’s soaring GDP comes from the country’s rapid industrial growth driven by the massive urbanization which is increasing demand for alu-minium and the raw materials used in its production.

The ‘winged’ metal’s consumption in the country is supported by increas-ing car production and infrastructure investments. During 2013, the Chinese automotive industry was the top gainer,

surging 14.9% after record sales of 21.98 million vehicles according to the China Association of Automobile Manufacturing. The National Bureau of Statistics data also showed that new construction projects rose by 13.5% in 2013. China is forecast to post robust growth in its auto market in the com-ing years, whereas the construction sector is strongly expected to expand further following the government’s latest urbanization initiatives.

According to the recently published blueprint, authorities intend to raise the proportion of urban residents to 60-65% of the total population by 2020, from the current 53.7%. By 2030, China’s cities will have added 350 million more people and five mil-lion buildings will be built. The new growth agenda will need the expan-sion of railways, roads, highways, and airlines to facilitate labour flows.

Urbanization along with the urban in-come growth will drive China’s transport and construction sectors which jointly account for over 50% of the country’s

total aluminium consumption, thus propelling demand for aluminium. As of today, the country accounts for 45% of global aluminium consumption, but is forecast to boost this share to 56% by 2025, extending its lead as the world’s biggest aluminium consumer.

Focus on efficiency

In 2013, China produced over 25 million tonnes of primary aluminium, almost half of the global output. However, further development of the Chinese aluminium industry is subject to cer-tain limitations in terms of power con-sumption and emissions by operating smelters.

Efficient resources utilization is one of the urgent issues now in China where over 90% of primary aluminium smelt-ers source energy from coal-fired power plants that account for 75% of all CO2

emissions in aluminium production. The government is also encouraging reduction in consumption of power, which accounts for about 40% of a smelter’s operating costs.

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In particular, the National Develop-ment and Reform Commission (NDRC) announced at the end of 2013 that efficient aluminium producers will continue to pay the same rates, but less-efficient producers will have to pay more. According to NDRC, producers that require 13,700-13,800 kilowatts to produce a tonne of aluminium will be charged an additional 0.02 yuan per kilowatt, while those who exceed 13,800 kilowatt per tonne must pay an additional 0.08 yuan per kilowatt. The surcharges would be effective increases of 1.8% - 7.4% to produce the metal in Henan province. The government is hoping that the move will push pro-ducers who have kept older facilities running in the hope of higher prices to finally cut their losses.

The situation in the industry is nev-ertheless still characterized by a net capacity increase. In 2013, despite de-pressed prices for aluminium, record high capacities were commissioned in China in 2013 (4.3 million tonnes) resulting in a 2.2 million tonnes net capacity increase.

In the first two months of 2014, the trend continued as Chinese aluminium industry experienced a net capacity rise of 1.6 million tonnes. Shutdowns in the central and southern parts of China amounted to 700 thousand tonnes in Jan-Feb 2014. Some aluminium smelters in the Central parts of China continue cutting output to reduce loss due to the falling domestic aluminium price.

Over 60% of Chinese aluminum pro-duction is underwater at the current domestic SHFE aluminium price. As expected, around 3 million tonnes of Chinese aluminium production will be cut in 2014 as a result of a low alu-minium price. However, some amount of new low-cost aluminium capacity will still go into production in Xinjiang and other North Western regions in 2014.

It should be noted here, that although China still appears to be a self-sufficient aluminium market, the country’s 12th five-year national development plan presumes transfer of some aluminium

production to the western parts of China with abundant coal resources and lower power costs as well as abroad.

Siberia next door

With that said, closer cooperation with Russia which shares a border with China could open up new opportunities for the Chinese aluminium industry that is taking important steps to improve its environmental footprint by spearhead-ing innovation and developing renew-able energy and reducing its addiction to coal – the source of 70% of China’s electricity and a major contributor of CO2

emissions.

Indeed, with a shared boundary of more than 4,000 km in length, it is logical that Russia and China are bound to develop mutually beneficial coopera-tion. Russia is home to the world’s second-largest hydro-energy resources with 75% of hydro-energy capacities located in Siberia. The greatest unreal-ized resources are in Eastern Siberia and the Russian Far East, perfectly located to meet growing demand from China.

VAP production at RUSAL’s Bratsk smelter

Cost-effective, renewable and envi-ronmentally friendly hydro-energy constitutes as a major competitive advantage of the region, home to six HPPs and eight power plants with pos-sible capacity expansions, Siberia’s hydro potential utilization rate is only 20%.

China’s proximity to Siberia, where most of the country’s production ca-pacities are based, is yet another fac-tor that would enable China to reap considerable benefits from expanding cooperation with Russia. The coun-try’s clear logistical advantage allows delivering physical metal to Chinese consumers at lower shipping costs within 2 weeks, versus 3-4 weeks of-fered by other global suppliers. This is particularly important, as Chinese aluminium smelters are increasingly being shifted to the Western provinces which will result in additional transport implications for downstream enter-prises in the East of the country.

Another promising avenue of coopera-tion with Chinese companies could

be the development of downstream clusters in Russia which have consid-erable growth potential on the home market in the coming years. In the light of expectations for the strong increase in Russia’s per capita aluminium con-sumption and the downstream seg-ment’s profitability, it is clear that any capital injections into this area will generate a healthy return. In terms of returns potential, aluminium can production, automotive components and extrusion production are seen as particularly promising.

RUSAL is currently working on conver-sion of its production facilities in the Western part of the country to produce aluminium- and aluminium alloys-based automotive components, rolled and cable products. The potential is huge. For instance in the automotive industry, despite a slight drop in car sales in 2013 due to the negative mac-roeconomic environment, the Rus-sian automobile market remains the second-largest in Europe and is poised to overtake Germany to become Eu-rope’s largest by 2016, and the world’s

fifth biggest, by 2020, according to the latest forecasts. Presently there are only 290 cars per 1,000 Russians, versus the already saturated market in Europe, where 560 of every 1,000 is a car-owner. The first step in this direction has been made recently, with RUSAL teaming up with an Israeli company Omen High Pressure Die Casting to create a joint venture to produce auto-motive components at the site of the Volkhov aluminium smelter.

The world’s biggest aluminium com-panies RUSAL, Chalco and Shandong Xinfa Group are already discussing the prospects for partnership including a joint smelting project in Siberia, bauxite exploration and technology exchange in red mud processing. Moreover, RUS-AL has prepared several road maps that set up plans for investment projects aimed at transforming its loss-making aluminium smelters and the develop-ment of new hi-tech production, which are open to foreign capital.

In view of the above, it is clear that the potential for deepening Russia-China

Pot Room at Rusal’s Khakas smelter

aluminium cooperation is as enormous as the benefits that both countries could reap through strengthening their ties. Therefore, the aluminium sec-tor could become yet another area of intense bilateral cooperation, on top of successful projects in oil and gas, energy industries as well as various high-tech sectors.

Company profile

UC RUSAL is the world’s largest alu-minium producer, accounting in 2013 for approximately 8% and 7% of global aluminium and alumina production respectively. The Company’s current capacity allows it to produce 4.5 million tonnes of aluminium and 11.9 million tonnes of alumina per annum.

UC RUSAL is vertically integrated to a high degree, having secured substan-tial supplies of bauxite and alumina production capacity. RUSAL’s assets include over 40 smelters and produc-tion facilities in 13 countries, across 5 continents. RUSAL employs 67,000 people.

The Company’s core smelters, locat-ed in Siberia, benefit from access to stranded hydro generated electricity, with its principal Siberian facilities in close proximity to important European and Asian markets.

The Company’s key sales markets are Europe, Russia and the CIS countries, North America, South-East Asia, Japan and Korea. The major end users consist of over 700 companies representing transport, construction and packaging industries.

Value added products account for over 40% of total metal produced.

RUSAL’s ordinary shares are listed on The Stock Exchange of Hong Kong Limited (Stock code: 486). Global depositary shares representing UC RUSAL’s ordinary shares are listed on the professional board of NYSE Euronext Paris (RUSAL/RUAL). Rus-sian depositary receipts representing RUSAL’s ordinary shares are listed on the Moscow Exchange (RUALR/RUALRS).

RUSAL owns a 27.8% stake in MMC Norilsk Nickel, the world’s largest pro-ducer of nickel and palladium and one of the world’s largest producers of platinum and copper.

Together with the Kazakhstan’s Na-tional Welfare fund “Samruk-Kazyna” RUSAL is developing the Ekibastuz coalfield in Central Asia. The 50/50 LLP Bogatyr Komir coal joint venture in Kazakhstan provides RUSAL with a natural energy hedge.

RUSAL is currently focusing on strengthening its competitive advan-tages, including its considerable raw material base, access to renewable energy sources, proprietary R&D capa-bilities and proximity to key markets.

UC RUSAL

Phone: +7 (495) 720-51-70

Email: Press-center@rusal.ru

Web: www.rusal.ru/en/

UC RUSAL is a leading global aluminium producer