Friday, November 27, 2009

Russia-China Aluminum Deal Raises Eyebrows

Defense News


Russia-China Aluminum Deal Raises Eyebrows


TAIPEI — An aluminum deal between China and Russia is raising questions after China North Industries Corp. (NORINCO), one of China’s biggest defense companies, announced plans to import 1.68 million tons of aluminum from Russian-based United Company (UC) RUSAL from 2010 to 2016.

NORINCO subsidiary Shenzhen North Investment (SZNORTH) signed a long-term electrolytic aluminum supply contract with UC RUSAL on Oct. 28 in Beijing. NOR­INCO President Zhao Gang, UC RUSAL CEO Oleg Deripaska and Zhang Zhenyu, vice director of Evaluation Bureau II for the China Development Bank, attended the contract-signing ceremony.

“The signing of the contract will help consolidate the rapidly developing economic and trade relations between China and Russia and play an important role in stabilizing SZNORTH’s upstream supply channels in the future,” a NORINCO news release said.

NORINCO is one of China’s key weapon manufacturers, producing everything from main battle tanks to small arms. UC RUSAL is the world’s largest aluminum and alumina producer in the world, accounting for 11 percent of the aluminum and 13 percent of the alumina for the international market. Observers are questioning NORINCO’s need for Russian aluminum, since China already produces the metal and exports its excess. The reasons appear to be both economic and strategic.

UC RUSAL has been experiencing serious financial problems, with $16.8 billion in foreign currency debt, and the Siberian plant’s proximity to China makes transportation cheap, said Vasily Kashin, a Moscow-based defense specialist.

The company “desperately needs big long­term deals, such as this NORINCO contract,” he said. “The financial details of the deal are not known, but it’s possible that NORINCO, knowing well about RUSAL’s difficulties, managed to get a much better price than it could get on the Chinese internal market.” China is providing the financing for the deal. In a NORINCO news release, Deripaska expressed gratitude to NORINCO for its initiative to operate the financing project of UC RUSAL and China Development Bank. He said that UC RUSAL is in the final procedures for getting listed in Hong Kong.

“There’s obviously something very funny going on about the deal,” said a U.S. defense analyst who spoke on condition of anonymity. “There is no rationale for the Chinese to buy aluminum; 90 percent of the making of aluminum is in energy costs, so the Chinese are saving costs in energy.” UC RUSAL has not shied away from investing in and dealing with China. In 2006, the company purchased a cathode plant in Shanxi, in northeastern China, that produces cathode blocks used as components in the production of aluminum. UC RUSAL says its Chinese plant provides a guaranteed supply of cathode blocks for its production facilities in Russia. The China plant supplies UC RUSAL smelters to provide 50 percent of the 30,000 tons needed a3nnually.

China has been keen to diversify its access to strategic metals and raw materials, and the defense industry has played a leading role in this effort, said Tai Ming Cheung, author of the book, “Fortifying China: The Struggle to Build a Modern Defense Economy.”

“China is one of the leading aluminum producers in the world, but is also a major consumer, and acquiring stable foreign sources is important in these efforts,” he said. “NORINCO has been active in signing agreements for extractive resources in Central Asia and other parts of the world, so this move to secure long-term foreign aluminum supplies fits in with this strategy.” Procuring such large amounts of aluminum is not intended just to supply the defense sector, “but will allow NORINCO to sell it in the domestic market,” he said.