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Experts in crisis: how Rusal withstood the commodity shock

Oleg Mukhamedshin Rusal Crisis Talk
By Mariam Meskin
26 Aug 2020

Oleg Mukhamedshin, deputy chief executive of Rusal, which produces 9% of the world’s aluminium, tells Mariam Meskin how the company has weathered yet another rocky period in commodity markets. And how its sustainability credentials have been affected by oil spills at its affiliate, Norilsk Nickel, in May and June.

Rusal, the world’s largest aluminium producer outside China, is no stranger to shocks. In April 2018, it was singled out for sanctions by the US for its links to Oleg Deripaska, an oligarch seen as close to the Kremlin. 

Shares in Rusal plummeted, while global aluminium markets went into a frenzy because of the potential blockage of such a large supplier.

A tumultuous nine months later, a deal was reached. Deripaska relinquished control over the company and the sanctions were lifted in January 2019. 

The saga taught Rusal valuable lessons about how to cope in difficult times. So when the Covid-19 pandemic and the ensuing global lockdowns sent commodity markets — including aluminium — into a tailspin, Rusal was prepared. The key to its success has been geographical diversification towards Asia.

Before that, in October 2019, Rusal had surprised observers by raising Russia’s first internationally syndicated sustainability linked loan. Loan bankers saw it as an impressive feat under the circumstances and a testament to the company’s standing in capital markets. 

GlobalCapital spoke to Mukhamedshin, Rusal’s director for strategy, business development and financial markets, about how the company has tackled the coronavirus crisis, its plans for more green debt issuance and whether sanctions could re-occur.


Commodity companies have been severely hit during the pandemic. How did Rusal manage the sharp fall in aluminium demand?

Since the start of the pandemic, we have seen a decline in demand for aluminium as a result of the economic slowdown and overall interruptions on the consumer side. As a result, many of the production sites around the globe paused or stopped activities in the second quarter. Our total aluminium sales declined by 4.4% in the first half of 2020, so clearly our sales were put under pressure, which is not a typical situation for Rusal.

But despite Covid-19 and the negative developments in consumer markets in the second quarter, we have demonstrated a recovery. Global aluminium demand was down 6.6% in the first half of 2020, but markets are coming back and business activity is returning to pre-crisis levels. Commodity markets are now recovering. Aluminium prices have increased above $1,700 per tonne, after having dropped below $1,500 in May. The average price pre-crisis was around $1,780, so there is a clear recovery.    

One of the main impacts of the crisis has been the re-shaping of our client geography. Since the pandemic began, we have seen increased demand in Asia and less in Europe. Due to the continued diversification of our client base, we successfully adjusted our sales geography in line with the new Covid-19 environment.

Although Europe still dominates our sales with 46% of total demand, we have seen an increase in consumption demand in Asia, which jumped up to 27% of total sales in the second quarter. We have seen more opportunities in exporting to China.

From an operational standpoint, despite the challenging circumstances we delivered results in line with expectations. Overall, our total sales declined by 4.4%, although the aluminium price fell more sharply, by almost 13%. But the significant drop in prices was partially offset by an improvement in the production cost, which decreased for us by 5.5%, as a result of lower oil prices and better cost management.

A second wave of Covid-19 might throw commodity markets into chaos once again. How are you preparing for that?

In preparation for a potential second wave of coronavirus, we have worked firstly on protecting our employees at our main production sites. We do tests for our employees on a regular basis, to ensure there is no impact to production.

The significant measures to reallocate our distribution network, for example focusing on China and other Asian markets, has helped to protect us from a lot of damage. Many of these countries in Asia are in a completely different shape than Europe is in, and therefore they are pretty much protected from a second wave. That is a benefit to us, because we plan to keep supplying to our new customers in these markets, whatever happens.

How did your banking group and investors respond to the crisis?

Firstly, we do not have any substantial debt repayments this year that would force us to the markets. Our total maturities for 2020 are around $200m, and we are definitely not short of cash. Therefore, we are not thinking of refinancing this year, but perhaps next year when markets have calmed.

Secondly, we have access to a strong domestic market, so we have not had to borrow internationally yet. We placed Rb10bn [$134m] in the local bond market and swapped part of it into dollars, which allowed us to achieve an effective interest rate below 3% for the dollar part. Most of our revenue is dollar-linked, so by using a currency swap we are able to avoid any currency risk arising from a stronger rouble.

We are obviously talking to our financing banks and the investor community. If we see any good windows of opportunity, then we will borrow from the market only if we can replace our existing terms with better ones.

Sustainability appears to be an important element in Rusal’s corporate strategy, highlighted by the sustainability-linked loan raised last year. Are there further plans for green financing?

The $1.1bn sustainability linked loan we signed in October was the first of its kind from a Russian company. We had a lot of interest from the market, so we exceeded our initial target of $750m.

The key performance indicators we chose were linked to our environmental impact. Our targets were to increase the production of our environmentally friendly ALLOW metal, to reduce our carbon footprint and to decrease our emissions. In July, a third party tested our KPIs and we were successful in meeting all three, which brought our margin down to 2.1%. [GlobalCapital understands the margin decreased by 15bp from 225bp.]

Our sustainability co-ordinators Natixis and Société Générale were crucial in helping us set our KPIs, which we believed were sufficiently ambitious.

We are ready to place green bonds. We have had this plan for a while. It is just a matter of market opportunity. Currently, it is a bit expensive to borrow in dollars, so we are focused on the rouble market. There is another interesting green bond product in Russia, and a lot of stakeholders are pushing for the further development of that type of financing. For now, Rusal is clearly the leader in the market in terms of our sustainability strategy.

When we see the opportunity to improve our overall debt profile and decrease our cost of financing, we will be able to re-approach the green financing market. We are already experienced and banks are interested in dealing with us.

Rusal is a key shareholder in Norilsk Nickel, which in recent months has been found to be responsible for two major oil spills. Does that relationship contradict your ambition to be a more environmentally conscious and sustainable company?

Rusal’s ability to raise financing has not been directly affected by our relationship with Norilsk Nickel. However, a lot of our investors and relationship banks have raised the same questions about our ties to Nornickel since the oil spills.

We believe that the management of Nornickel has to pay more attention to environmental issues and it also has to adopt a more professional approach to the situation that has happened. 

We have seen some comments from other Nornickel shareholders stating that Rusal is just pushing for more dividends. That is not the case. Nornickel is paying dividends strictly in conformity with the dividend formula which Nornickel management itself proposed in 2016.

Rusal always supports any projects related to the improvement of environmental situation. We are on the board of Norilsk Nickel and every year we vote for more capital expenditure on the representation by Nornickel management. That has always been supported by the board of Norilsk Nickel, though funnily enough they never spend the full budget they plan for themselves.

We do not see any conflicts between Rusal and Norilsk Nickel in terms of our sustainability. There is an opportunity to improve the environmental situation at Norilsk and that is what we are advising them to do. Norilsk Nickel has enough money for capital expenditure — it is just a case of improving the investment management.

Rusal is one of the few Russian companies to have been sanctioned and then released from sanctions by the US. How did the company adapt to survive during the sanction period? Are you at risk of being re-sanctioned?

It is very clear that Rusal is an important part of the global aluminium industry. We are the largest aluminium producer outside China, and we are involved in the network in several ways, being the producer of bauxite, as well as the producer of primary metals and more.

After the sanctions in 2018, the price of aluminium skyrocketed after the threat of Rusal leaving the market, which would lead to a significant deficit of the metal and that was very noisy. Since then, no one argues that Rusal plays a major part in the global aluminium industry and therefore it cannot be sanctioned. That, combined with the changes to the corporate governance that we made, makes it very unlikely that Rusal will ever be sanctioned again.

By Mariam Meskin
26 Aug 2020