Rusal indicates production cut

United Company Rusal, the world’s largest aluminium producer by volume, reported a sharp drop in first-quarter net profit and warned it might start cutting production later this year.

Net profit in the three months to March 31 fell 84 per cent to $74m compared with the same period last year as the price per tonne of aluminium dropped 13 per cent from a year ago, the company said. Its net debt rose 0.7 per cent to $11.1bn, while first-quarter sales fell 3.7 per cent to $2.9bn.

Rusal said it was considering cutting its global capacity by 4-6 per cent in the second half of the year, citing continued uncertainty about the state of the global economy. Analysts interpreted this as a cry for help to the Russian government.

The state plans to announce an increase in tariff prices this summer but could theoretically work out an agreement with Rusal so that the company could avoid cutting jobs at its European smelters, said Andrew Jones of Renaissance Capital.

Matthias Warnig, who is close to Russia’s president Vladimir Putin and on Monday was nominated a Rusal independent director, could be helping in the negotiations.

A former spy from East Germany, Mr Warnig already serves on the board of state-owned lender VTB – a connection that could help Rusal with its debt covenants – and is seen as being close to the Kremlin.

Erik Danemar, an analyst at Deutsche Bank in Moscow, said: “If you look at his record, clearly he is a character that has been involved in senior level discussions.”

Slowing growth in the Chinese economy has prompted the global metals industry to curb costs and put the brakes on expansion.

The aluminium sector has been under particularly heavy pressure because of slowing growth in the Chinese economy, causing mining groups Rio Tinto and BHP Billiton to announce plans to rein in their spending.

US producer Alcoa slashed global capacity by 12 per cent at the beginning of this year, while state-run Aluminum Corp of China reported a net loss of $173m for the first quarter.

In addition to market pressures, Rusal is also enveloped in a shareholder battle that has contributed to a 28 per cent drop in the company’s stock price over the past three months.

Viktor Vekselberg, the Russian billionaire who stepped down as chairman in March, had fallen out with rival shareholder Oleg Deripaska over the company’s refusal to sell its 25 per cent stake in Norilsk Nickel and his claim that Rusal was in “deep crisis” because of bad management and a heavy debt load.

He filed a lawsuit in London last month challenging a supply contract between Rusal and Glencore, the commodities trader that owns an 8.75 per cent stake in the Russian aluminium group.

The company said the eurozone financial crisis and the slowdown in Chinese demand were likely to dominate the outlook for the metal markets in the months to come. But it said a severe contraction was unlikely because of higher US demand and an expected recovery in Chinese consumption in the second half of the year.

Rusal shares fell 1.4 per cent to HK$4.96 in Hong Kong on Monday.