Russian group UC Rusal, the world's largest aluminum producer, said it would cut capacity 3 per cent by year-end and was taking a charge on its investment in Africa, as it grapples with weak prices and rising power costs.
Rusal, which produces 9 per cent of the world's primary aluminum, has been hurt by persistently weak prices for the metal used in drink cans, car parts, aircraft and iPads. Slack demand and overproduction have pushed prices close to two-year lows.
It reported a net second-quarter loss of $37-million (U.S.) on Monday, including a $167-million impairment related to its Friguia alumina refinery in Guinea, where it faces a government challenge to its operations.
Chief financial officer Evgeny Kornilov said in a conference call: "Since April, the plant is on strike, which is illegal as ruled by the local court. Also, the plant has a high cost of production, which makes operations there, at present, uneconomical."
Unions say that a 2006 contract that sold the Friguia refinery to Rusal should be annulled.
Rusal continues to operate in Guinea where it also owns Compagnie des Bauxites de Kindia (CBK), its largest raw materials asset, which together with the Friguia complex accounts for more than 40 per cent of the company's bauxite output. Rusal also owns the Dian Dian bauxite project in Guinea.
It said that the planned cut of 150,000 tonnes of aluminum capacity by the end of 2012 – about 4 per cent of expected 2012 output – would be part of a review of 275,000 tonnes of capacity that could be replaced by cheaper smelters being built in Siberia.
Capacity cuts would be at Rusal's Russian aluminum smelters Nadvoitsy, Bogoslovsk, Volkhov and Novokuznetsk. Early this year, Rusal said it planned to cut aluminum capacity by 6 per cent within 18 months.
Investment firm SUAL Partners, a co-owner of Rusal, said on Monday that it opposed Rusal's plan to shut down some aluminum capacity in Russia and voted against the program.
It suggested that Rusal could instead shut down its Aluminium Smelter Company of Nigeria, which SUAL says is making a loss.
SUAL Partners owns a 15.8-per-cent stake in Rusal, which is controlled by Russian businessman Oleg Deripaska. SUAL, led by ex-Rusal chairman Viktor Vekselberg, has been in a dispute over the giant supply deal between Rusal and commodities trader Glencore since the spring.
Meanwhile, concerns about weakening demand have also prompted rivals Alcoa and Norsk Hydro to cut capacity.
Rusal revised down its full-year forecast for global primary aluminum consumption to 6 per cent growth, from 7 per cent, and said that it expected 10-per-cent growth in demand from China, against a previous estimate of 11 per cent.
It said that demand from China is likely to speed up in the second half of the year, driven by economic stimulus programs being launched by the government.
Tight cost controls helped Rusal to beat earnings estimates despite a 72-per-cent drop in recurring net profit.
Rusal and rivals Alcoa and Aluminum Corp. of China Ltd (Chalco) are struggling with aluminum prices down 5 per cent this year.
"Second-quarter earnings were better than expected, largely due to better cost controls and higher LME premiums, but otherwise no surprise," said Robin Tsui of BOCI Research.
"Rusal should outperform its rivals and be able to make a profit at the current aluminum price level due to its relatively low production costs."
Despite Rusal's market-leading position, the weak operating environment has increased pressure on the company, which is also embroiled in a shareholder battle over its stake in Norilsk Nickel.
Rusal's Hong Kong-listed shares have fallen 12 per cent this year.
The company said that second-quarter recurring net profit fell 72 per cent to $143-million, compared with a forecast for $110-million in a Reuters poll.
Recurring net profit is defined as adjusted net profit plus the company's net effective share in the results of Russian group Norilsk Nickel, the world's largest nickel and palladium miner.
Its earnings are sensitive to aluminum prices. A 10-per-cent price increase could nearly double the company's 2013 earnings, Standard Chartered said in a research note.
Rusal said that it had net debt of $10.9-billion at the end of June and no short-term obligations until the end of the year.
It said it will have to pay $450-million to lenders in 2013 and has sufficient liquidity to meet those obligations.