COLUMN-United Company RUSAL; waving or drowning?: Andy Home

(Andy Home is a Reuters columnist. The opinions expressed are his own)

LONDON, March 5 (Reuters) - The price of aluminium has once again fallen into producer pain territory, raising the prospect of a new round of capacity curtailments.

The last collective attempt at supply restraint was triggered when a prolonged price decline troughed just below the $2,000 per tonne level in the fourth quarter of 2011.

U.S. producer Alcoa took the lead back then with a mix of permanent capacity closures and temporary production curtailments.

In total some 1.2 million tonnes of aluminium smelter capacity were idled through the first half of 2012.

Alas to no avail.

Total reported stocks, comprising those held by the London Metal Exchange (LME) and the Shanghai Futures Exchange, Japanese port stocks and producer inventories, still rose by 361,000 tonnes last year.

The "warehouse wars" still raging across the LME's delivery network obscure any simple read-through from exchange inventory to underlying market dynamics, meaning that last year's rise in reported stocks may have overstated or understated the "real" level of surplus.

The price, though, tells its own story because LME three-month metal is once again floundering below $2,000.

And this time it is that other behemoth producer, United Company RUSAL, that is leading the way with a promised 300,000 tonnes of annualised cutbacks.

WAVING...?

RUSAL's chief executive Oleg Deripaska has long lambasted aluminium producers' inability to regulate supply into the market-place.

"The current conditions faced by the aluminium industry require all producers to act responsibly in order to ensure the sector remains competitive", he said at the time of the company's Q3 2012 results.

Few in the aluminium market would disagree.

Despite clear signs of continued over-supply and the corrosive price impact of high legacy stocks the world's producers increased output by 2.8 percent in 2012 even with those curtailments.

Last year ended with another all-time record run-rate of 45.7 million tonnes annualised, according to the International Aluminium Institute.

Fingers have been pointed at the Chinese, where government subsidies, both local and national, have kept high-cost plants operating, even while a new generation of smelters ramps up in the northwestern provinces.

Fingers have also been pointed at stocks financiers, whose activities have caused physical premiums to rise, providing a life-line to margin-compressed smelters outside of China.

Subsidies, which incidentally are not confined to China, witness the A$40m "assistance package" given Alcoa's Point Henry smelter in Australia by the local government, and historically high premiums have certainly exacerbated structural over-supply.

But the stark reality facing Western producers is that if they want to right the market, they will have to do so themselves.

From that perspective RUSAL's cutbacks might be seen as waving the flag for others to follow.

DÉJÀ VU?

Except these cuts are not quite what they seem.

The company was promising cutbacks, somewhere in the region of 300,000-600,000 tonnes, as long ago as its Q1 2012 results.

By the time of its half-yearly 2012 results the figure had been whittled down to 275,000 tonnes and by the fourth quarter of last year the process was already being implemented.

RUSAL's Q4 production of primary aluminium was down by 2 percent year-on-year with full-year output noticeably falling at the Nadvoitsy smelter (down 20 percent), the Bogoslovsk smelter (down 17 percent) and the Urals smelter (down 8 percent).

All three are located in Western Russia and together with other plants such as Volkhov and Novokuznetsk had already been identified in an August 2012 press release as the main targets for what RUSAL called the "gradual curtailment of less-efficient capacity".

What has changed is the time-line.

In August the company expected the first tranche of cuts to be in place by the end of 2012, the second tranche by the end of 2015 and the last tranche, two potrooms at Novokuznetsk, by 2018.

Now it is targeting the full 300,000-tonnes per year of annualised cuts to be in place by the end of this year, an accelerated time-table that probably owes much to the most recent renewed slide in the LME price.

DOWN, DOWN

Nor are these cuts some sort of altruistic gesture to the market.

They are driven by the financial necessity to keep moving down the cost-curve, just as every other major producer is trying to do.

At Bogoslovsk "the high electricity tariff makes the modernisation of the current equipment unfeasible," RUSAL said back in August 2012.

Aluminium production at Volkhov and Novokuznetsk will be "uneconomical" once current power supply contracts expire at the end of 2015, it said in the same statement.

The overall theme is one of transferring capacity from older, higher-cost facilities in the European part of Russia to lower-cost Siberian operations, including the new 600,000-tonne per year Boguchansk smelter which is expected to pour first metal later this year.

Underpinning the renewed sense of urgency about eliminating higher-cost production was an average group production cost of $1,946 per tonne last year, down only a very marginal 1.9 percent from 2011 levels.

RUSAL should in theory be reaping some benefit from the rise in physical premiums but with much of its "commodity-grade" metal going into a long-term off-take deal with trade house Glencore, a minority shareholder, how much exactly is a moot point.

...OR DROWNING?

Glencore has just reported a $1.2 billion non-cash impairment charge against its 8.75 percent holding in RUSAL.

That's a reflection of just how dire the business of producing aluminium has become, even for a company with RUSAL's scale of operations.

Core earnings last year slumped by 63 percent to $913 million and the previous year's net profit of $237 million collapsed to a net loss of $55m in 2012.

RUSAL's current capitalisation, basis a share price that has been battered since the 2010 partial float, values the company at $8.3 billion.

Which is pretty much the value of its shareholding in Russian base metals giant Norilsk Nickel.

In other words, the market is saying that the company's core business, that of making aluminium, is in effect worthless.

Throw some huge debts into the financial mix and RUSAL's dependence on markets other than aluminium is almost total.

These production curtailments may look like flag-waving by an industry leader but are more a sign of a company drowning beneath the weight of surplus aluminium.

The best that can be said of RUSAL is that it won't be the only aluminium producer struggling to stay above water at current prices.

The race to the bottom goes on.

(Editing by William Hardy)