Deripaska Says ‘Happy Times’ Are Over for Aluminum Companies

Feb. 2 (Bloomberg) -- Oleg Deripaska, the biggest shareholder of the world’s largest aluminum producer, said he expects “no more happy times” in the industry as the sluggish global economy saps demand.
Deripaska, whose stake in United Co. Rusal makes him Russia’s richest man, predicted aluminum will average $1,600 per ton in the next seven years, compared with a current level of $1,349. Rusal Chairman Viktor Vekselberg, in contrast, has said he’s “100 percent sure” the price will reach $2,000 a ton this year. The metal traded at a record of $3,380.15 on July 11, 2008.
“We will see a completely different landscape in the metals industry that will stay for the next seven to 10 years,” Deripaska, Rusal’s chief executive, told reporters in Davos, Switzerland Jan. 31, where he attended the World Economic Forum. “What’s important at the moment for the metals and mining industry is to really stop hoping and prepare for the worst,”
Global demand for aluminum will fall by almost a quarter, to 28 million tons this year, from about 36.5 million tons in 2008, said Deripaska. Producers including Alcoa Inc. and Rio Tinto Group have announced output cuts. The global economy will show little or now growth this year, the International Monetary Fund predicted on Jan. 28.
“There is enormous oversupply,” said Deripaska, 41. “There will be shut downs, and companies will have to make decisions about what capacity should be cut. In my view, there will be fewer countries in the world producing the metal.”
Russia
More metals will be sold under long-term contracts, and less on the spot market, he said.
“The model of vertically integrated companies will be seriously examined, which most likely will lead to a considerable disintegration of downstream capacity,” Deripaska said.
Russia, the world’s biggest supplier of aluminum, natural gas and nickel, faces rising unemployment as plunging commodity prices reduce export earnings. Russia has pledged more than $200 billion to battle its worst financial crisis since 1998, including $50 billion for companies that have debts with lenders abroad, among them Rusal.
Moscow-based Rusal used its 25 percent stake in OAO GMK Norilsk Nickel, the world’s biggest nickel and palladium producer, as collateral for a $4.5 billion loan from Russian state bank Vnesheconombank.
Rusal may pay back its bank loans through a convertible bond issue, Deripaska said. There is no talk of the bank getting a stake in Rusal, he said.
‘Exchange of Ideas’
Russia’s economy, which expanded by an average 7.1 percent a year since 2001, will contract by 0.2 percent this year, the government says.
Deripaska and billionaire investors Vladimir Potanin and Alisher Usmanov last month proposed the government prepare plans to create a consolidated mining company. The merged entity would get access to state funds to repay debt. Deripaska and Usmanov urged the government to become a shareholder in the new company, which would be formed around Norilsk. Deripaska didn’t include Rusal in his merger proposal.
“There is just an exchange of ideas,” he said yesterday. “It should be a real company, not a mass grave.”
He reiterated that Rusal won’t take part in the holding as it needs to restructure its debt, which Vekselberg puts at $16.3 billion.
“I cannot see the synergy,” Deripaska said. “It is as if you crossbreed a chicken and a duck. What do you expect it will do? Fly or perhaps swim?”
Deripaska also said that an initial public offering of Rusal shares is still “on the agenda.” He didn’t comment on the possibility of a private placement of shares in Rusal.
Deripaska was ranked by Forbes as the wealthiest Russian in April 2008.