The main trend this year for the non-ferrous metallurgy industry in general, is toward the reduction in the price of all groups of metals. Many businesses are forced to revise their investment programs, increase the timing of their implementation, as well as to cut production.

Trends in the global industry

Since the end of 2011, the global economic situation with non-ferrous metals began to deteriorate. Metals stocks rose sharply in the warehouses, a decrease in consumption of metals in the real sectors of the economy occurred, and the corresponding reduction in output took place, as a result of which prices began to fall. In June 2012, this trend continued. As such, according to world agencies, non-ferrous metal stocks in the warehouses of the London Metal Exchange (LME) in June 2012 changed slightly: aluminum reserves decreased from 4,918.9 to 4,822.65 million tons, nickel reserves declined from 107.1 thousand tons to 103, three thousand tons, zinc reserves increased from 940.8 to 994.7 thousand tons, copper stocks rose from 238.95 to 256.3 thousand tons, and the reserves of lead were virtually unchanged, going from 349.5 to 349.0 thousand tons.

According to the International Aluminum Institute (IAI), the total world reserves of aluminum fell in June by 76 thousand tons to 2.03 million tons.

Average daily primary aluminum production in June 2012 increased by 1.5 percent compared to May 2012, reaching 125.5 thousand tons. This happened due to increased aluminum production in China, which rose from 54.1 thousand tons per day to 56.1 thousand tons, a new historic record for the country. Aluminum output outside of China in May fell by 0.3 percent to 69.3 thousand tons.

European countries cut aluminum output by 0.7 percent to 9.9 tons per day in Western Europe, and 0.6 percent to 11.8 thousand tons in Central and Eastern Europe.

In South America, production fell marginally by 0.25 percent to 5.8 tons per day, while in North America it grew by 0.06 percent, to 13.2 tons.

According to the World Bureau of Metal Statistics (WBMS), the global copper market in the first five months of the year had a shortage of 94 thousand tons, compared with an excess amount of 421 thousand tons in 2011.

Global copper consumption in this period amounted to 8.474 million tons against 19.477 million tons in all of 2011. China’s apparent consumption of copper increased by 800 thousand tons to 3.671 million tons (43 percent of world demand).

Refined copper production rose in January-April, up 3.4 percent compared to the same period of the previous year to 8.38 million tons, with a marked increase in metal production in Spain, Iran, and India.

According to the World Bureau of Metal Statistics (WBMS), excess production on the global zinc market in January-May was 253 thousand tons. The global market had an excess of zinc in the amount of 551 tons in 2011. World production of refined zinc decreased in January-May by 3.1 percent, while consumption decreased by three percent even.

From January to May, the nickel market had excess production of 26 thousand tons, compared with an excess of the metal at seven thousand tons in all of 2011.

In the first five months of the year, refined nickel production reached 711.6 thousand tons, whereas the apparent demand for the metal was 685 thousand tons (an increase of 60 thousand tons over the same period of the previous year).

Nickel mining stood at 795.4 thousand tons in the first five months, or 132 tons more than in January-May 2011.

Situation in the industry in Russia

Despite the difficult situation in the global non-ferrous metallurgy industry, Russia continues production growth due to lower prices for all major metals.

The production of non-ferrous metals in January-June 2012 was 102.7 percent of the figure for January-June of the previous year. In June 2012, production was 104.7 percent of the total for June 2011. June 2012 production was 102.6 percent of the previous month’s figure. The increase over the previous year was attributable to larger volumes of exports.

Despite unfavorable global market conditions, the volume of Russian exports of basic metals increased.

As such, the export of copper and articles made from it in bulk tonnage increased in January-June 2012 by 24.0 percent compared to January-June 2011. Exports of aluminum and articles made from it rose 15.95 percent, and exports of nickel and articles thereof rose by 61.45 percent, which offset the loss of revenue resulting from lower world prices for base metals.

The rate of output for products of high added value, which are mainly used in the domestic market, grew in line with the general growth of the Russian economy and in the first five months of the year reached 104.1 percent of the figure for January-June 2011. The production of base metals reached 101.5 percent compared to the same period of 2011.

The mining of non-ferrous metals in Russia generally supports the needs of the metallurgical complex. As such, in January-June 2012 the mining of gold-bearing ores and concentrates increased by 5.8 percent against January-June 2011. The mining of ores and concentrates of silver went up by 17.4 percent.

Bauxite mining in January-June 2012 increased by 2.1 percent compared to the same period of 2011. Alumina production for the period increased by 0.5 percent.

The mining of copper concentrate in Russia in January-June 2012 increased by 4.8 percent. The extraction of zinc concentrate in January-June 2012 increased by 6.5 percent compared to the same period in 2011, even while the production of tungsten concentrate fell by 5.9 percent.

Secondary resources, including scrap and waste non-ferrous metals, were also utilized to augment production.

The production of primary aluminum in the first half of this year was determined by the level of demand in domestic and foreign markets. The level of production of primary aluminum in January-June 2012 was 103.2 percent of where it had been during January-June 2011. While June 2012 results were only 95.5 percent of the output for May 2012, they were 106.7 percent of the figure for June of the previous year.

The production at Russian aluminum smelters was influenced by the dynamics of export supplies of raw aluminum, which grew by 21.6 percent to 1,875.2 thousand tons compared to 1,541.8 thousand tons in January-June 2011. Production of alloys based on primary aluminum in January-June 2012 increased by 7.2 percent compared to January-June 2011. Aluminum companies increased the production of more expensive and highly profitable foundry alloys of primary aluminum.

Reduction in the output of primary aluminum takes place mostly at non-competitive aluminum plants, where operating costs and the payment of interest on loans exceed USD2,500 per ton. The average monthly world price for primary aluminum in the six months of 2012 stood at USD2,078.0 per ton. Plants and manufactures facing fiscal problems are shifting to the production of aluminum alloys. This month, for instance, Rusap announced the completion of modernization works at its aluminum division West. As a result, the company will be able to make high-quality casting alloys with greater added value at its old production complexes at the Volkhov, the Nadvoitsy, and the Ural aluminum smelters. The completion of modernization of the Volgograd and the Kandalaksha aluminum plants is expected in the first quarter of 2013.

According to current data, in the first half of 2012, the production of primary aluminum and alloys thereof went up on a year-on-year basis to 104.2 percent at the Urals Aluminum Plant, 103.2 percent at the Bogoslovskiy smelter, 100.6 percent at the Volgograd Aluminum Plant, 101.9 percent at the Krasnoyarsk Aluminum Plant, 97.8 percent at the Sayanogorokom smelter, and 105.3 percent at the Novokuznetsk Aluminum Plant.

Production of refined copper in January-June 2012 totaled 95.2 percent against the figures for January-June 2011. The decrease in June 2012 against June 2011 was 4.4 percent. The decrease in June 2012 against May 2012 was 6.7 percent.

Exports of refined copper increased in January-June 2012 to 156.3 thousand tons over 76.4 tons exported from January to June 2011. Average monthly shipments rose to 26.1 tons against 15.3 tons per month on average in 2011. Exports of processed products, such as copper wire, were lower than in the previous year. From January to June 2012 shipments of processed products were 175.4 thousand tons against 188.6 thousand tons in January-June 2011. The average monthly deliveries for the first six months of 2012 declined to 29.2 thousand tons against 31.3 tons on average in 2011.

Norilsk Nickel’s production of refined copper went down to 97.6 percent in January-June 2012 of the figure for the corresponding period of the previous year. Ural Mining and Smelting Company’s production of refined copper was 98.7 percent of the results generated in January-June 2011. The Novgorod-based factory Russian Copper Company saw production results go down to 87.4 percent of the volume produced from January to June 2012. Kyshtym Copper Electrolyte Plant saw its production output fall to 76.7 percent of the figure from the same period of 2011. Decreased production of refined copper at the Novgorod factory and at the Kyshtym Copper Electrolyte Plant were caused by a deficiency of copper scrap in Russia.

The production of raw nickel in January-June 2012 amounted to 102.6 percent of the production figures for January-June 2011. In June 2012, nickel production rose by 9.0 percent compared to production figures for June 2011. The market experienced a significant growth of nickel export from 84.8 tons in January-June 2011 to 140.5 tons in January-June 2012. Growth of exports in 2012 can be attributed to a better organization of work for exports promotion. Export shipments of nickel in June 2011 were 1.3 thousand tons, whereas in June 2012 they stood at 16.9 thousand tons.

Norilsk Nickel remains stable in its operations, producing the most competitive products. The company’s total production in January-June 2012 increased to 104.4 percent of the production figures for the similar period of 2011. Yuzhuralnickel’s production of nickel in January-June 2012 was 91.4 percent of the production level registered in January-June 2011. The production of Ufaleynickel declined to 95.3 percent of last year’s number for the corresponding period.

When prices are low almost all Russian nickel enterprises, with the notable exception of Norilsk Nickel, experience losses. Since November 8, 2011 one of Russia’s nickel plants, the Rezhsky Nickel plant, which produced nickel for Ufaleynickel was actually shut down. While the plant resumed operations on March 15, 2012, the new ownership now contemplates halting production again for modernization upgrades.

Lead production in January-June 2012 decreased by 7.2 percent. Magnesium production increased by 28.1 percent, and the production of magnesium alloys went up by 31.8 percent. The production of cobalt concentrate increased 26.3 percent, but the production of cobalt declined 4.8 percent. Titanium production increased by 38.8 percent, and the production of wires and rods of titanium rose by 32.1 percent.

Market players

Norilsk Nickel.In the first half of 2012, the total production of nickel at Norilsk Nickel increased seven percent to reach 145.463 tons against 135.672 tons in H1 2011. The total production of copper in the first half was down three percent to 178.242 tons compared to 184.430 tons a year earlier. From January to June, Norilsk Nickel produced 1,378,000 ounces of palladium, which is three percent lower than the figure for the same period of the previous year (1,425,000 ounces). In the reporting period, the company produced 352 thousand troy ounces of platinum, which is two percent less than in January-June 2011 (360 thousand troy ounces).

RUSAL.In the first quarter of 2012, the largest aluminum producer in the world Rusal increased the production of aluminum by 3.5 percent compared to the same period in 2011, with output reaching 1.049 million tons. However, due to the ongoing macroeconomic instability, the company is considering the possibility of reducing the production of aluminum by 300-600 thousand tons per year starting from the second half of 2012. According to preliminary data, the Irkutsk aluminum smelter (IrkAZ) (part of RUSAL), increased its production of raw aluminum for the first six months of 2012 by 3.5 thousand tons compared to the same period of 2011. The total production of raw aluminum at the Irkutsk aluminum smelter was about 202 thousand tons. The output of commercial aluminum was about 205.5 thousand tons, a figure that represents the company’s over-performance of its business plan by more than 1.5 tons, as well as an increase of more than four tons compared with the first half of 2011.

UMMC. Ural Mining and Metallurgical Company in the first half of 2012 received 44,940,000 roubles of net profit. For the same period of the previous year, the net profit of UMMC was significantly higher at 5.19 billion roubles.

AVISMA.In the first half of 2012, VSMPO-Avisma received 2.902 billion roubles of net profit under RAS, which is four percent higher than the result for the previous year. The revenues of the VSMPO-Avisma in the first half of 2012 amounted to 18.831 billion roubles, a figure 31 percent higher than the result for the same period of the previous year.

CZP.From January to June 2012, the Chelyabinsk Zinc Plant (CZP) produced 81.247 tons of commercial zinc and zinc alloys, which is 1 percent less than the plant’s results for the same period of 2011 (82.046 tons). 65.1 percent of the metal was sold on the Russian market. In the first half of 2012, Nova Zinc, owned by the same group of persons to which the CZP belongs, produced 16.676 tons of zinc concentrate, up 4.4 percent compared to H1 2011 (17.443 tons). Nova Zinc also produced 1.995 thousand tons of lead concentrate, which is 32.1 percent less than in the first half of 2011 (2.939 tons).

Investment in the industry

In the first quarter of 2012 a revival of investment activity in the industry took place. The level of investment in non-ferrous metals in the first quarter of 2012 amounted to 160.3 percent. In 2011, the level of investment was 125.2 percent. Investment in the mining and refining of non-ferrous metals in the first quarter of 2012 was at 126.0 percent. The construction of two new aluminum smelters, the Boguchanonogo and the Taishet, is now underway, so is a major modernization program at Norilsk Nickel. The Kola MMC is creating a production line for electrolytic cobalt. Reconstruction work has already begun. Investment in the project is estimated at two billion roubles, and the completion is anticipated for 2015. Vnesheconombank (VEB) is increasing funding for the construction of an aluminum plant Boguchanekogo (Boaz) (project implemented jointly by Rusal and RusHydro) from 21 billion roubles to 47 billion roubles, according to VEB Chairman Vladimir Dmitriev. Dmitriev explained that the budget for the project increased due to the increased production targets, as the plant will produce 300 tons of aluminum per year instead of the original 150 tons. In the spring of 2013, the first production facility at the plant will have all of its 67 industrial machines in operational condition. RUSAL has also reported on the implementation of its modernization program for the Novokuznetsk aluminum plant, which will increase the manufacture of products with high added value.

RUSAL invested more than 170 million roubles in this project. The Russian Copper Company in June 18, 2012 published the results of the construction of a mining and processing Tomiiskiy plant in the Chelyabinsk region. Investment in the project field development and construction of the plant will stand at 22.24 billion roubles, and the capacity of the first stage will be 14 million tons. The total capacity is expected to reach 28 million tons of ore. The first stage of the mining and hydrometallurgical plant is scheduled for commissioning in December 2014.

Gazprombank opened credit lines in the amount of 531 million dollars for a period of seven to 10 years for the Miheevskiy porphyry copper deposit project in the Chelyabinsk region. The project is ran by the Miheevskiy GOK, which is a part of the Russian Copper Company. The plan for developing the Miheevskiy copper porphyry deposit includes the design and construction of an open pit mine with the capacity of up to 18 million tons per year, as well as the construction of a processing plant for the production of copper concentrate, and the construction of the auxiliary and external infrastructure. The investment budget for the project is over 780 million dollars. The launch of the mining and processing plant is planned for the fourth quarter of 2013.

RUSNANO and VSMPO-Avisma joined forces in the field of metallurgy, as the companies entered into a strategic partnership agreement. The parties intend to develop a strategic partnership for the implementation and commercialization of nanotechnology solutions in the field of metallurgy. To coordinate joint efforts, there will be established a working group consisting of representatives from both companies.

Problems and prospects

The main trend this year for the industry in general is the reduction in the price of all the groups of metals. Many businesses are forced to revise their investment programs and increase the timing of their implementation, as well as to cut production. For example, Rusal plans to make a decision for withdrawing 10 percent of its capacity in the second half of 2012. Among other possible options is the optimization of organizational structures, such as in the instance of the parent company’s absorbing its most essential subsidiaries. The analysis of transactions, financing and debt financing in the sector in the first half of 2012, conducted by Ernst & Young, demonstrates the declining value and number of transactions in the first half of the year under the influence of macro-economic uncertainty and market volatility.

According to Lee Downham, the head of the global practice of Ernst & Young for contract support in the mining and steel sectors, the high increase in costs in the mining and metals sector on the global scale means a shift could very well take place in the direction of corporate development: the share of mergers and acquisitions in the investment structure of companies is increasing. The main question that bothers Russian investors at this stage concerns the possible prospects for the industry in view of Russia’s accession to the WTO. Experts argue that metallurgy is among the industries that will benefit from WTO membership. In general, the effect will be to change the fee structure for both exports and imports. Export duties on metals will be reduced or canceled, which is a positive factor, since it will give businesses more revenue and profit, the main resource of investment in Russian metallurgy.

At the same time, protective duties on the export of scrap, ferrous and non-ferrous metals will be reduced, which can lead to the growth of their exports and significantly complicate the situation with raw materials supply of individual enterprises. Import duties would not change the overall situation, but at the same time will ultimately lead to the reduction of duties on certain types of steel, colored steel, and cable products. It is to be expected that the pressure of imports will increase slightly and there is a risk of loss for smelters that produce high value-added products. All this requires additional efforts to strengthen competitiveness, modernize production, and increase efficiency. Every major company in non-ferrous metallurgy and in the steel industry in the last ten years has implemented several major investment projects to upgrade facilities, improve product quality, reduce the negative impact on the environment, and develop raw material sources. Still, there is a need to understand how to construct the Russian economy as it develops and how the steel industry fits into this new model.