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RUSAL to split in two, enhance focus on low-carbon aluminum

21 May 2021 William Fleeson

Russian aluminum maker RUSAL has announced a split that will create two companies, the better to meet demand for low-carbon products.

The company, responsible for 6% of global aluminum production, will separate its higher-carbon assets from its low-carbon ones and allow the reconfigured pair of firms to pursue separate goals and markets.

RUSAL's low-carbon business will be renamed AL+, a nod to parent company EN+, an industrial group that owns just over half of the subsidiary. The other company, as-yet unnamed, will operate with higher levels of carbon content.

The maneuver will create "two businesses with separate strategies," RUSAL said.

RUSAL executives called the "demerger" a move toward carbon-reduction plans already in place. EN+ in January unveiled plans to reach net-zero carbon emissions by 2050, which reflects rising trends—and pressure from investors and policymakers—in heavy industries like energy, metals, and mining.

The split is significant given the prominence of RUSAL among global aluminum producers. The company is the largest supplier outside China.

The demerger is "firmly in the interests of both companies," said Bernard Zonneveld, RUSAL's board chairman. Splitting the two firms will "enable AL+ to focus on its net-zero priorities," Zonneveld said, while creating room for the new company to realize a long-term modernization plan.

The strategy reflects "environmental stewardship progress" for both firms, said Evgenii Nikitin, RUSAL general director.

Nikitin went further, generalizing that the current energy transition offers no alternatives to an environmental, social, and governance (ESG)-first approach for advanced and developing industries and countries. "Sustainable growth is the only possible basis for the development of industries around the world," he said.

The push for "green aluminum" is the industry's response to the far broader energy transition, which ties in efforts to enhance ESG measures that are now gaining pace globally.

Green aluminum is aluminum produced by methods that emit low carbon levels or, perhaps in the future, no carbon at all. RUSAL, in its announcement, noted that AL+ would seek to develop technologies that could one day "deliver" on "the promise of carbon-free aluminum production."

Hydro advantage

RUSAL's latest sustainability report said ALLOW creates aluminum from smelters that source their power needs from hydro-electric facilities, creating four to five times less carbon emissions than a traditional, coal-fired smelter.

Market observers saw the decision as a way to stay ahead of the global decarbonization curve, as industrial giants everywhere move to cut carbon—and compete for the resources, like clean power, that ESG changes require.

"I view [the decision] as RUSAL management being proactive," said John Mothersole, a pricing and purchasing director at IHS Markit. "Management has recognized the company's strength and has been positioning it to maximize this advantage for some time."

Mothersole noted that RUSAL enjoys a competitive advantage that many heavy-industry firms don't have—a large, cheap, low-carbon power supply. In RUSAL's case, that is a fleet of hydropower assets, some built decades ago, in the parts of Russian Siberia where RUSAL operates.

"The company was bequeathed with a predominately renewable power source from the old Soviet Union and in some sense is running with it," he said.

Aluminum production relies on a form of electrolysis treatment that requires massive quantities of electricity. Given RUSAL's use of Siberian hydropower, the company claims that about 90% of its aluminum is made from renewable energy.

The power is used in smelters to break up the ore of the metal bauxite. Power is also needed in refineries to convert the compound known as alumina into aluminum after being extracted from the bauxite.

The demerger likewise extends progress RUSAL wants to make on emissions cuts. The company has a standing commitment to lowering CO2 emissions from its smelters by 15%, and by 10% from its refineries, by 2025—both from a 2014 baseline.

The company's bifurcation may also reflect a need to cater to the requirements of European customers subject to the laws of the European Union (EU). The bloc is implementing a Carbon Border Adjustment Mechanism, a controversial policy that aims to align non-EU trading partners with EU climate standards. The EU has some of the world's most aggressive climate policies.

Europe faces the dual challenge of rising aluminum demand for everything from consumer products to buildings—and making sure the metal is low carbon. The region's aluminum consumption is set to double between 2010-2050, according to the Brussels-based industry group European Aluminum.

As European industries that rely on aluminum look to decarbonize their supply chains, companies like a revamped RUSAL stand to benefit—if they can adapt.

RUSAL's modernization plans and hydro-heavy power supplies help RUSAL stand out from other suppliers, especially Chinese ones, Mothersole said—a key selling point for the world's increasingly demanding aluminum buyers.

The new company "stands in marked contrast to the big Chinese players, which really look 'dirty' in comparison," Mothersole said. "This may end up being the biggest long-term effect [of the demerger], by highlighting how uncompetitive the Chinese industry is when environmental considerations are fully taken into account."

Posted 21 May 2021 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit

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