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This abridged report on the Russian Aluminum Industry is provided
courtesy of Palms & Company, Inc.

by Dr. Peter Palms Phd

On the background of the general industrial decline, Russian aluminum
industry is considered to be a successful branch of metallurgy. This
is based mostly on the fact that primary aluminum, a basic product of
aluminum industry, produced by Russian aluminum plants, is in stable
demand on the world market. And this is all despite the fact that
almost 60 % alumina processed by Russian plants is imported and the
plants are located deep in Russia's hinterland, 4,000 to 6,000 km far
from the ports through which import comes, which make the production
cost of aluminum quite high. The dramatic drop of the domestic market
of aluminum products (84% in 2002 as compared with 1990) has not much
affected the Russian aluminum plants, which switched almost totally to
producing primary aluminum.

Moreover, competition on the world market made Russian producers take
measures to improve the quality of metal, although this task was not
an easy one, as 10 out of 11 currently operating aluminum plants were
commissioned in 1930 - 1970-s with no throughout modernization since

Russian aluminum plants operated at 100 % of their total capacities in
2002 and produced 3 million tons of primary aluminum (13 % of the
world production).
Production of rolled products, and semi-finished products, and
construction facilities, and finished products declined by more than
84%s as compared with the year 1990 and totaled 280,000 tons in 2002.
The reason for was that these products were not in demand on the domestic market.
The competitiveness of those products on the world market is negatively
affected by limited ability of Russian manufacturers to ensure Western
standards for the thermal and mechanic processing of aluminum alloys, surface
quality, and geometrical dimensions precision of cold-rolled sheets, plates, and
extruded profiles, which are used in industries and construction.

The raw materials sector of Russian aluminum industry, despite high
demand for alumina, faces problems, too. Alumina producers face
economic difficulties because of domestic raw materials low quality,
rather scarce reserves of aluminous ores, high costs of mining and
transportation. The perspective for alumina producers to overcome
difficulties largely depends on investments to modernize the
production cycle and reduce production costs. Meanwhile, the registered reserves
of bauxites and nepheline ores give reason to expect that for the
foreseeable future, the alumina production will stay at the year 2002
level or will grow by 10 - 20 %. There are excellent opportunities for
user nations to save money on imports by buying Russian aluminium

Over the last 8 years, Russian aluminum plants produced 22.5 million
tons of primary aluminum and exported 17.2 million tons, which accounts for 76.4 %
of the total output (in 2001 and 2002, the share of export was even higher,
84 % and 88 % respectively). The amount of sales income from the exports
has totaled approximately 17 billion US dollars, or, in average, 2.1
billion US dollars annually. Every year, the value of products manufactured abroad of
Russian aluminum, totaled 8 billion US dollars. This sum is almost
twice as large as the total annual income of the Russian aluminum industry. Besides, some
part of Russian aluminum returned to Russia as imported aluminum
products (their volume in 2001 and 2002 totaled 100,000 and 90,000
tons respectively).

At the same time, economic self-reliance of Russian aluminum plants
(this largely accounts for the plants located in East Siberia, which
produce over 70 % of the total Russian aluminum output) was ensured
mainly due to low costs of their fixed capital reproduction, low
salaries of workers, and cheap electric energy supplied by Siberian
hydro-electric stations, which had low operation costs as well. World
prices for fixed capital and for the products manufactured on its
basis are rather high, and one had reason to expect the cheap capital of
out-of-date Russian aluminum plants to have been
reproduced in the form of modern and thus more expensive production
capacities. However, this has not happened. Low depreciation rates,
which accounted for about 3% of fixed capital book value, have failed
to ensure even a simplest kind of modernization. Higher depreciation
rates (about 10 - 15 % for outdated fixed assets) would result in the growth of the cost
of primary aluminum and damage its competitiveness on the world

Presently, all Russian aluminum plants badly need large investments to
modernize their producing units. Meanwhile rising energy costs
worldwide as high as $1400 per metric ton, have continued to make
Russian aluminium competitive Russian aluminum industry is strongly influenced not only by the world
aluminum market conjuncture, but also by the corporate financial
management of production and foreign economic activities related to
import of raw materials and export of products. The expenses of
Russian aluminum for supply/sales activities and for servicing short-term
credits (the latter is the major source to increase working capital)
differed in 2001 as of 1 : 16 (on the basis of 1 ton of aluminum
produced and sold), commercial expenses differed as of 1 : 4, monetary
resources on currency accounts differed by the end of the year as of 1
: 40. Correlation of short-term liabilities and fixed capital
fluctuated from 4 - 5% at most successful plants to 150 - 170 % at
loss making enterprises that had practically depleted their

Common problems for most Russian aluminum plants, which operate
through importing raw materials and exporting the major part of their
products, are:
instability in raw materials supply and in produced aluminum sales, as
the result of short-term contracts concluded between aluminum
manufacturers and intermediaries, which act as suppliers of raw
materials and sellers of products. These trade intermediaries, in
fact, largely shape the financial flows of aluminum plants in a way, which
did not help the producers to operate efficiently. Russian managers of
aluminum plants, which largely operate on the tolling scheme, are
actually deprived of the opportunity to implement their designed
strategic plans, to perform necessary maneuvers with financial
resources that are supposed to be used in a most rational
way in the course of production activity and investment projects

Thus, the widely spread in Russian business circles and mass media
view of the domestic aluminum industry as prosperous is based not on
detailed insight and analysis, but on general output indications and
perceptions, inherited from the Soviet economy. The current situation
in Russian aluminum industry is unique in the world practices. It never happened in any
other country that national aluminum industry served for years as an
intermediate link for other country's aluminum industry with little
perspective to reproduce its own fixed assets, with its own
manufacturing capacities standing idle waiting for investments to
modernize producer units and launch production of competitive products. Meanwhile, Russian authorities
surely understand that technical progress in the world industries
largely depends on wide-range use of aluminum in such branches as
automobile industry, aircraft and space industry, shipbuilding, food
industry, construction industry, etc. Holding second position (after
the USA) in aluminum production and using only one tenth of the metal
smelted, Russia has fallen behind many developed countries in terms of
technical level of many equipment and consumer goods items, for which
aluminum is used.

Russian aluminum industry enterprises, and aluminum plants in
particular, are at the cross-roads. On the one hand, the policy of
survival through overexploiting the capacities has proved to be
hopeless for aluminum industry at large and for the plants in
particular. Still, top management of some plants may go on with it. On the other hand, the managers with
strategic vision grow to believe that their future, as well as the
future of all Russian aluminum industry, is in making vertically integrated
aluminum companies, which would include raw materials divisions,
processing and manufacturing divisions. As the world practice for over
100 years has shown, it is this kind of organization that ensures both normal operation of
aluminum corporations and priority development of finished products
manufacturing. It enables the aluminum companies to design and
implement their strategic plans with the focus on increasing value
added components and capital accumulation for further development. Yet
so far, the real owners of the Russian aluminum plants (Russian and
foreign businessmen who bought large packages of these plants during
privatization) keep the beaten track of pursuing immediate gains. They
are satisfied with their business based on over exploitation of fixed
assets, and they are not interested in structural reforms that might
undermine this kind of business. However, the Sayansky aluminum plant
has seemingly made a breakthrough, as it has embarked on establishing
the first vertically integrated aluminum company. In 1997, it founded
Sibirskiy Aluminiy group based on the Sayansky aluminum plant.

Meanwhile "compensatory invest" and "Countertrade" offer significant
opportunitiest to Brazilian extrustion manufacturers to pay Russian
smelters for their aluminium ingots with value added products
manufactured from the raw material
It should be noted that until the end of 1996 the Sayansky plant was,
in fact, managed by the British trading company-mediator Trans World
Group (TWG), which owned a large shareholding of the enterprise and
performed expensive services in foreign management. Having shrugged
off the TWG's grip, the plant managed, within 1997, to increase its profit
fivefold, the added value by 150%, the working capital by 400%, and to
cut down commercial expenses by52% times, and to stop borrowing
practices. The Bird rating of Sayansky plant among the world aluminum
producers was 54, which was the highest among Russian plants.

The drastic drop of world prices for aluminum did not prevent the
Sayansky plant from gaining high profitability (more than 15 %). Thus,
capital funds and working capital were preserved. Moreover, the
plants'administration set the aim to intensify the enterprise's activities and to actively
influence the domestic aluminum market, which, naturally, depends on
the development of Russia-located processing manufactures that
presently experience technological problems and technological

Sibirskiy Aluminiy group is a vertically integrated company, which
embraces a number of leading enterprises of the Russian aluminum
industry. It ensures a complete cycle of operation from primary aluminum production to
sophisticated products output. The group includes: the Joint-Stock
Company Sayanskiy Aluminiyevyi Zavod (the 3d rating in Russia in terms
of primary aluminum production capacity, a most state-of-the-art and
envirosafe enterprise), Joint-Stock Company Samarskiy
Metallurgicheskiy Zavod (a largest enterprise in the Eastern Europe as for the output of
rolled and semi-finished products made of aluminum and its alloys, it
is equipped with the machinery for large-size products extrusion,
though needs modernization), Joint-Stock Company Sayanskaya Folga (a
leading in Russia and the largest in the CIS producer of aluminum
foil, including superthin foil, and foil-based packing materials),
Rostar-Holding (the leading Russian producer of aluminum tins for beverages), the Joint-Stock Company
Abakanvagonmash (a leading Russian producer of heavy-load containers,
universal platforms, and special goods vans), and several other enterprises,
including a large agricultural products company and enterprises
constituting a trade network in Russia and abroad. Presently, Sibirskiy Aluminiy
group plans to develop into a transnational one by means of
integration with the aluminum industry enterprises of Ukraine and Kazakhstan that
have considerable capacities to produce alumina.

In 1998, some new production capacities were put into operation at the
group's enterprises, including production units to manufacture
aluminum tins for beverages (first ever in Russia). At the same time, the group
launched a project that provides for utilization of aluminum tins (a network of
tins collection points was established in Moscow). Two new
electrolysis shops at the Sayansky aluminum plant were commissioned, and, as a
result, the plant's capacity increased by 15 % and annual output of aluminum reached
380,000 tons (by 2002 the capacity had increased to 610,000 tons).
Simultaneously, all profit from aluminum production was channeled to
the company's new manufacturing capacities. The work to modernize some
production units at Samarskiy Metallurgicheskiy Zavodhas begun.
Joint-Stock Company Sayanskaya Folga's output grew as well, too. By
early 1999, the Russian market was fully provided with foil, and the
company's export has grown over the last years..

Sibirskiy Aluminiy group's oncoming plans include output growth for
the goods which are in demand in Russia and in the CIS states ( called FSU
in USA). The company has a program to stimulate domestic demand. The
program provides for granting tied loans for modernization to food
industry enterprises to encourage them to use aluminum packaging, particularly aluminum
tins for beverages. On the basis of cooperation with largest aluminum
companies, particularly, Reynolds (US), a number of programs are
scheduled to be implemented in Europe,America, and the Southeast Asia.

In the above context, Sibirskiy Aluminiy company has a chance to
become a Gazprom-like "natural monopolist" in the Russian aluminum industry.
The company's top management is able to do that on condition that it
ensures aluminum plant's efficacy growth, which would bring the
plants'characteristics close to the standards of leading Western aluminum
companies. Yet, the success of Sibirsky Aluminiy does not provide
answer to the prospects of the entire Russian aluminum industry
development. The answer to this question will depend largely on the
outcome of structural reforms in the industrial sectors as the whole,
and this process has just started. Still, the development of aluminum
industry enterprises that have entered the market and have acquired a
large experience of operation in the conditions of free competition is
likely to be the fastest as compared with all other industries.

Brazilian companies interested in purchasing aluminium ingots and
billets can contact Palms & Company at Aluminium@PeterPalms.com.

As fontes russas de suprimentos

Por Peter Palms, PhD

12 de Agosto de 2002

A Rússia continua sendo um país que pode oferecer preços acessíveis aos importadores brasileiros de matérias-primas, materiais químicos, metais, carvão e petróleo. As empresas metalúrgicas russas freqüentemente conseguem evitar o pagamento de suas contas de eletricidade. Nos Estados Unidos, o custo em eletricidade para se produzir uma tonelada de alumínio é de US$1400. Com mão-de-obra mais barata e sem despesas com aluguel ou empréstimos, os produtores russos de alumínio têm um custo de produção muito mais baixo. Há uma grande margem de diferença entre a taxa de câmbio oficial e taxa de câmbio de mercado que torna vantajoso negociar as compras em rublos.

Também é possível realizar transações comercias em que o pagamento seja feito em forma de mercadorias brasileiras de exportação tais como frutas enlatadas, vegetais, carnes e aves, roupas, couro, café, açúcar e laticínios.

Devido ao fato de a burocracia ser exaustiva, é preferível determinar os preços f.o.b. (free on board - não incluindo o preço de frete e seguro de transporte) e deixar os compradores russos fazer os arranjos para o registro dos produtos junto às agências reguladoras e em obediência às regras e impostos de importação.

Uma tática importante é convidar russos para visitar você em seu país. Visitas olho-no-olho aumentam sua credibilidade, incluindo possibilidades de que russos abram contas bancárias nas filias de bancos americanos no Brasil, uma oportunidade que eles vão apreciar.

Com relação a produtos de baixo valor, não hesite em enviar amostras por meio do correio tradicional depois de confirmar o número de registro da companhia na Rússia e obter as referências bancárias.

Somente pague pelas mercadorias depois da inspeção e mantenha a fiscalização depois que as mercadorias tiveram ultrapassado as fronteiras da Rússia. Evite, se possível, cartas de crédito porque entregas imediatas não são asseguradas o que pode vir a lhe custar perdas com as taxas das cartas de crédito. É melhor se guarnecer de diferentes formas de garantia de pagamentos e usar transações declaradas em rublos sempre que possível. Quem você conhece é sempre mais importante do que quais são as regras. Na Rússia, as regras existem para serem quebradas. Elas não funcionam como forma de coerção nem obediência. Sempre que um tradutor ou intérprete for necessário, sempre use o seu, trazido com você de seu país. Um conselheiro experiente irá lhe poupar dinheiro e evitar que você caia em armadilhas, ciladas e surpresas.

Dr. Petrus Joannes van de Waal-Palms IV, PhD, President Palms & Company, Inc., E-commerce Marketing Consultants - Founded. 1934 Search Engine Optimization Experts - IT & ERP Advisors Palms Harbor Lights Building, Suite 103 515 Lake Street South Kirkland (Seattle), State of Washington The United States of America, 98033 Fax: 1 425 827 5528
Email: Palms@PeterPalms.com
WWW: http://www.PeterPalms.com

Camara de Comercio e Industria Brasil - Russia
Rua Cornélio Pires, 06, Cep: 04320-140 - São Paulo- S.P - Brasil
Telefone/ Fax: +55 11 3637-7143