In late 2003, prices for nonferrous metals rose as economic decline in the West came to an end. Russian nonferrous metal producers’ export-orientation and rising prices on the world market are having a favorable effect on the industry.

Nikolai Samsonov

Siberia is home to significant deposits of , copper, and complex (lead-zinc) ores, as well as the world’s largest aluminum, nickel, and copper mills and Russia’s leading tin producer. The integration of Siberian nonferrous metallurgy into the world market means that changing market conditions have a direct impact on the industry.
According to data from the Institute for the Economy in Transition, nonferrous metals have lost their dominant influence on the growth dynamics of Russian metal production, as ferrous metals took the lead. Production in 2003 increased by 6.2% versus 2002 (the growth rate in ferrous metals equals 108.9%). Compared to 2002, aluminum production grew by 103.9% and nickel and cobalt production by 105.3%, which fully compensates for the decline in the previous year. As in the past, the domestic demand for nonferrous metals was relatively low due to reduced demand from the Russian military-industrial complex. For this reason, most of the industry’s products went abroad. In 2003, 80% of all aluminum, nickel, and copper produced were exported. One of the main factors for this increase in sales was last year’s substantial rise in export prices. Starting in early 2003, average prices on the London Metal Exchange rose, as aluminum prices increased by 12.6%, nickel by 76.5%, copper by 33.6%, tin by 36.5%, lead by 55.5% and zinc by 25.1%. The domestic market for nonferrous metals remains limited, even though since 2002 Russian consumption of aluminum increased by 14.3%, nickel by 25%, and copper by 28% according to data from the Russian Ministry of Industry, Science, and Technology.

Aluminum intrigues

Everything is extremely clear in aluminum production, and the rules of the game were established long ago. The leading Russian plants producing primary aluminum are located in Siberia. Two vertically integrated holding companies, Russky Aluminum (RUSAL) and SUAL-Holding, produce 75% and 25% of all Russian raw aluminum respectively. The main problem facing Russian aluminum producers is the limited supply of raw inputs. A significant portion of Russian aluminum is produced by tolling contract (around 80%). Aluminum mills, which lost their traditional sources of alumina when the USSR collapsed, were threatened with closure. Tolling was introduced in 1992 as a temporary emergency measure to eliminate the alumina deficit and end this crisis. Bauxite from abroad was processed in Russian and the resulting metal was shipped back to the raw input suppliers. Despite the lack of raw materials, RUSAL became the second largest producer of aluminum after the American Alcoa, which owns four aluminum mills. RUSAL produces 10% of the world’s primary aluminum.
There is another reason limiting Russian aluminum producers’ export earnings. Despite the fact that Siberia aluminum is in demand on the world market, the export price for Russian companies is significantly lower than that established on the London exchange even in futures contracts. Peter Fennimore, Acting Deputy Sales Director at RUSAL, believes that “one of the obstacles aluminum producers are facing on the world market is the historically specific attitude toward Russian metal, the belief that it is not high quality. Russian suppliers are also considered less reliable than Western ones.” Foreign buyers are in no hurry to take note of the fact that almost all Russian aluminum mills have received LME quality certificates. As a result, prices on the LME and the prices offered for Russian aluminum are converging only very slowly.
Over the course of 2003, the world aluminum market saw a small but positive trend, and the maximal average cash price for aluminum set at the end of the year was $1,555.30 per ton. “The aluminum industry has recently seen growth in basic indicators for production, consumption, and export turnover,” states Ivan Kozhevnikov, Director of Sales at the Sayanogorsk Aluminum Works. “If we take the world aluminum market as a whole, it is characterized by upswings and downturns. Aluminum is a good indicator of the state of consumer markets and many industries, such as the automotive industry, construction, and packaging. In other words, high aluminum prices are connected with world economic upturns.” Analysts’ predictions that price growth would adjust itself in 2004 due to an overheated market and stabilized consumption levels in the US and China proved correct. The average price increase for the first five months of 2004 was only 0.4%.
High aluminum prices and increased demand for high valued-added products (such as slabs, cylinders, and foundry alloys) caused companies to reevaluate the types of products they make. Their strategy is to increase production of processed products, which will require significant investment.

The nickel-copper crown

Nickel and copper production, along with aluminum, are the most advanced areas of the Siberian nonferrous metal industry. Norilsk Nickel sets the pace as the largest nickel producer in Russia (90.2%) and the world, and the world’s eighth largest copper producer (2.9%).
Nickel is predominantly used to manufacture stainless steel, which is why the majority of nickel goes to large steel producers. In 2003, Norilsk sent 61% of its nickel to Europe, 25% to Asia, 9% to North America, and only 5% stayed on the domestic market. The average price for nickel rose by 76.4% from January to December 2003 due to increased demand from China and the general recovery of the world economy.
In 2003, Norilsk Nickel earned $5.2 billion from sales of nonferrous and precious metals, 68% more than in 2002. The company sold a total of 308,000 tons of nickel and 467,000 tons of copper. The proportion of nickel to the total metal sold by the company remained steady at 55%, while copper’s share fell from 23% to 16%, thanks to increased sales of platinum and gold. However, in monetary terms, Norilsk sold $120.1 million more copper (16.1% more) than in 2002.
Norilsk Nickel announced that it was reorganizing the management of its foreign sales divisions. Now the company’s sales are clearly divided geographically: Norilsk Nickel Europe Ltd. makes sales on the European market and Norilsk Nickel USA on the American market. The Asian market is the responsibility of Norilsk Nickel Asia Ltd. in Hong Kong. Norilsk directors believe that these new companies will help promote the Norilsk brand in America, Asia, and Europe.

Polymetallic clouds

According to the International Lead and Zinc Study Group, things also looked up on the world market for lead and zinc. Demand for refined lead grew by 1.1% versus 2002. China and the US acted as catalysts in this process. Over the past several years, lead consumption in the Middle Kingdom has increased consistently and grew by 8% in 2003. China’s active expansion of its navy, increased battery exports, and telecom’s move to new high-capacity batteries all led to a greater demand for lead. This caused prices for lead to change in 2003. The cash price of a ton of lead rose consistently over the course of last year at an average rate of 4.2% a month, rising by 72.2% to a price of $739.50 per ton by year’s end. Higher zinc prices were primarily the result to production declining by 0.9% as facilities in Macedonia and Canada closed and production in Bulgaria, China, Poland, and South Africa fell. The average monthly price increase was 2.1%, and prices rose by 33.5% versus the beginning of 2003. The price for a ton of zinc crossed the $1000 mark and reached $1008 dollars per ton by the end of 2003. The situation on the zinc market remains unstable, as the LME warehouses are still full. The correlation between the lead and zinc markets means that if the market for one metal begins to decline, the other will follow suit.

Tin men

No one, not even the most optimistic, expected the increase in prices for tin that occurred during the first several months of 2004 (and started in September-October 2003). The average monthly cash price per ton of tin on the LME exceed the $5,000 mark in October of last year, and by December it had already climbed to $6,057. And prices kept going up, rising by 2.9% in February and by a record-breaking 17.5% in April. Experts are pointing to a tin deficit as the reason behind this record price increase, firstly due to reduced exports from China where economic growth is leading to higher demand for the metal, and secondly due to predictions of a coming tin deficit (the price of three- and fifteen-month futures contracts rose in unison with spot prices). In 2003, prices on futures sometimes exceeded cash prices or were approximately the same. Early this year, the ratio changed completely. Spot prices differed from futures by 5.7% in favor of the former. This demonstrates that market players with long-term contracts have negative expectations for market development.
A dramatic increase in world tin consumption has led to a 10-11% deficit, and demand has exceeded the supply from large producers, which has resulted in more cash purchases. Only large tin exporter countries can satisfy this demand, countries such as China, Peru, Malaysia, and Indonesia. Compared to foreign producers, Russia’s tin concentrate processor, the Novosibirsk Tin Works (NOK), is losing out on all fronts.
NOK produced 4,100 tons in 2003, 19.3% less than in 2002, despite its capacity of 20,000 tons a year. This means the plant is only operating at around 20% capacity. As a result, of the 250-260,000 tons of tin produced in the world each year, NOK only has a 1.5-2% share.
The reason behind this decline in tin production lies in the company’s rejection of tolling supply contracts, which are losing propositions. This fact led to even larger deficits in the raw material. This forced the company’s management to try and develop its own source of inputs. NOK gained control over tin producers such as Deputatskolovo (Yakutia), Khingan Tin (Jewish Autonomous District), Dalolovo, Sakhaolovo (Yakutia), and Vostokolovo (Kharbarovsk Territory). The company is also developing the Pravourmiisk deposit in the Kharbarovsk Territory. Despite the decrease in production, NOK hopes to increase production in 2004-2005 to 6,000 tons of tin a year and 3,000 tons of foundry and welding alloys.
The future of Russian tin producers and their prospects on the world market as equal partners look unfavorable due to the low competitiveness of available ores and the influx of less expensive imported metal.
Metal for a rainy day
In conclusion, we can say that on one hand, nonferrous metals have caught their second wind after the crisis years of economic transition. The industry now has a clear-cut chain of production and new sales channels, and Russian aluminum and nickel producers are actively taking over foreign market expanses and successfully competing on world markets. On the other hand, the systemic crisis facing Siberia’s complex ore producers has put the possibility of setting up a major syndicate on the agenda, a large company to unite lead and zinc producers, as well as process these metals for the export market.
The idea is nothing new and could work. However, at present there are no serious investors capable of putting large amounts of money into Siberian mines, as the majority of deposits are not highly profitable and demand long periods to see a return. This is not a major threat, though, as the wealth of Siberia can be seen as strategic reserves for Russia’s future.

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