Russia’s United Aluminum Corporation declines due to rising electricity prices

It is reported that the United Aluminum Corporation of Russia is gradually losing its main competitive advantage - cheap electricity. According to the newspaper, the electricity bill paid by the company’s aluminum plant in the first quarter of this year increased by approximately 130 million U.S. dollars, an increase of 40%.

Sources close to Oleg Jeripaska and sources from the Russian Electricity Market Committee stated that the electricity bill for UCI’s Siberia aluminum plants increased by 43% in the first quarter of this year. Aluminium spokesman confirmed the news. He said that this refers to all expenses related to electricity, including electricity, generation capacity (maintenance fees paid to the power station), transmission service fees, and other infrastructure costs. The spokesman said that the company is located in the European part of Russia and in the Ural region, and its electricity expenses have increased by 27%. However, the output of these factories only accounts for 15% of the total output.

Sources said that the reason for the substantial increase in electricity bills of United Aluminum Corporation is that the hydropower stations in Siberia have changed their payment methods. According to the new regulations in the electricity market, users who signed direct power supply contracts with Siberian hydropower stations must make up for the differences between thermoelectricity and hydropower prices to other consumers. In fact, this is the practice of allocating cheap hydropower to all consumers to lower the average price of electricity.

Alcoa’s aluminum plant is the main user of hydroelectric power plants in Siberia and has purchased approximately one-third of its electricity, including direct contracts with the Irkutsk Power Company and the Krasnoyarsk Hydroelectric Station.

Analyst Vadim Aspatrikovi said that rising electricity bills have had a negative impact on Union Aluminum: Cheap electricity bills are one of the company’s major competitive advantages. According to data from United Aluminum Corporation, electricity costs accounted for 25% of total production costs last year, and the industry's average level was 36%. Aspatovich estimates that the company’s current target is 30%, and the production cost per ton of aluminum exceeds US$2,000. In this way, United Aluminum Corporation’s electricity expenses in the first quarter increased by approximately 130 million U.S. dollars from the fourth quarter of last year: from 490 million U.S. dollars to 620 million U.S. dollars.

From 90 onwards, Russia’s aluminum production costs are the lowest in the world – less than $1,000 per ton. However, by the end of 2010, the costs of BHP Billiton and Rio Tinto were lower than those of United Aluminum Corporation. Aspatrikov stated that Norsk Hydro and Alcoa are now catching up.

Over the past year, the price of aluminum has barely changed, which is about 2,500 US dollars per ton. Since 2000, aluminum prices have exceeded 2000 U.S. dollars in only about four years - from the end of 2005 to the end of 2008 and the end of 2009 so far. However, electricity costs are related to aluminum prices. Aspatrikovic said that when aluminum prices fall, company expenses will also decrease. However, it is very difficult to reduce other expenses. The company significantly reduced its management and business expenses in 2010, and there is little room for reductions. However, he believes that the price of aluminum in the short term will not be less than 2,000 US dollars per ton: According to the news of VTBCapital, the average price of aluminum in 2011 is 2625 US dollars.