United Company RUSAL : Rusal CEO : A Quarter Of Global Aluminum Capacity Loss-Making

Russian aluminum producer United Co. Rusal PLC (0486.HK) said Friday that the aluminum market is still plagued by excess production capacity with a quarter of the global market operating at a loss.

Chief Executive Oleg Deripaska told reporters in London he expects the aluminum price to hover around $2,200-$2,400 a metric ton to this year but not more, as China faces a deficit of 600,000 tons and customer stocks around the world are at 10-year lows.

He noted, however, that worldwide aluminum stocks are still high and largely tied up in financing deals.

Deripaska estimated that about 5.2 million tons or 27% of China's production capacity is loss-making at the moment but noted that they can't stop operating because if they did, they would soon enter bankruptcy given their high debt levels.

China's "aluminium industry [has been] built on credit," he said. "Everyone believes that it [regional subsidies] should end but ... nothing will happen in next 12 months. The new government will not immediately change the situation."

China is in the process of transitioning between leaders, which means the world's largest aluminum producing nation is unlikely to enact big reforms until 18 months from now, according to Deripaska.

Nevertheless, Deripaska said he remains upbeat about aluminum demand and prices. Physical demand is at a 26-year high and has resulted in the "highest premium we've ever seen customer paying," he added.

He said he expects aluminum prices will rise once confidence about the global economy returns to customers whose stocks are low. Chinese aluminum demand is forecast to grow between 7% to 8% in 2012, according to Deripaska, down from 11% in 2011.

Meanwhile supply and demand growth in the rest of the world is set to remain largely balanced, Deripaska said.

In Russia, the company is embarking upon a modernization program as the government pushes to increase environmental penalties by 25 times the current level, he said. The company plans to shut down 300,000-600,000 tons of smelting capacity within the next 18 months.

The Russian government is also considering making a hefty investment in Eastern Siberia to the tune of up to $16 billion over the next six years which would double the region's 25-million-ton-a-year port capacity and expand the region's existing railway capacity by nearly 40%, he said.

"All our Russian champions will benefit from this," he added.

Separately, Deripaska told reporters that Rusal's former chairman, Russian billionaire Viktor Vekselberg, had no plans to sell his shares after abruptly stepping down from his position last month.

"He doesn't want to sell shares. He is very happy just to be a shareholder," Deripaska said.

Vekselberg, who with his business partner Len Blavatnik owns 15.8% of Rusal, accused Deripaska upon his resignation of pushing the company into "a deep crisis" and warned that it was "overburdened with debt and entangled in numerous lawsuits and social conflicts."

Rusal is currently embroiled in an arbitration proceeding with one of its former shareholders, who alleges the company and commodities trader Glencore International PLC (GLEN.LN) entered into contracts that were in breach of shareholder arrangements.

Deripaska said he couldn't comment on the arbitration but he can't see it changing the company's strategy. "I can't see that the contract was bad because of the premium," he said, adding that he was talking in general terms about the company's approach to commercial contracts.