RUSAL Moves Up in the World

Union workers in Guinea began demonstrating Jan. 10, demanding political and economic reforms, including the resignation of ailing and aged Guinean President Lansana Conte. The strike has continued despite Conte's Jan. 24 offer to name a new prime minister. Although the little African country is one that many people might not be able to pinpoint on a map, the protesting workers have managed to make quite a global impact by disrupting the world's second-largest producer of bauxite, the primary source of aluminum.

Guinea has three significant bauxite mining operations. The Russian Aluminum Group (RUSAL) controls the operations in Fria and Kindia that produce -- respectively, 2.8 million and 3 million metric tons of bauxite annually. The third operation, in Sangaredi, is controlled by U.S. company Alcoa and Canadian firm Alcan and produces 14 million metric tons of bauxite per year. The ongoing strikes halted output at the Alcoa-Alcan consortium-led operation but have not affected RUSAL's operations.

Guinea holds approximately 30 percent of the world's bauxite reserves and is second only to Australia in global production, so a major disruption in the country's production does not cause a ripple on the markets -- it causes a tremor. Consider that bauxite is the primary ore of alumina used to make aluminum. Aluminum is used in everything from aerospace and defense (most defense aircraft have 70 percent or more aluminum construction) to little everyday utilitarian goods. Thus, the production of aluminum -- one of the most widely used metals in the world -- is oddly dependent on the political fluctuations and disposition of a tiny African country and a few mining giants.

In response to the major strike disruptions, alumina prices spiked at $275 per ton Jan. 22, up from $230 the previous week on fears of tighter supply.

The uncertainty in the market caused by Guinea's internal political struggles underscores another layer of uncertainty in the market: RUSAL's position in the bauxite-aluminum industry. Russian mining giant RUSAL had the only operations in Guinea unaffected by the strikes, which helps -- and highlights -- Russian attempts to gain a controlling share of the global aluminum market.

Although RUSAL's bauxite production in Guinea is not even half that of Alcan and Alcoa's, the Russian firm has made notable gains over time by doing business the "Russian" way. For instance, after Conte visited the Kremlin in 2001, RUSAL gained Guinea's second-largest bauxite operation in an agreement that directly contradicted another commitment the Guinean government had made to Alcan and Alcoa that allowed the North American firms the right of first refusal over additional exploration. Basically, Guinea revoked Alcan and Alcoa's right to refuse a competing company entry in new explorations.

RUSAL's gains are not limited to Guinea; it also has tapped into Australia, the world's largest producer of bauxite. In April 2005, RUSAL took a 20 percent stake in Australia's Queensland Alumina Ltd., the world's largest alumina refiner, in a deal worth $401 million. The refinery produces alumina from bauxite. It was the company's first significant aluminum investment outside the former Soviet Union. RUSAL has since attempted to expand its interests in Australia, establishing a working group with the Queensland state government to develop power projects in June 2006 to competitively produce electric energy for the operation of aluminum production facilities.

RUSAL's biggest move in the industry is its recent merger with the SUAL Group and Swiss company Glencore International to create the United Company RUSAL. The new company jumped past Alcan and Alcoa to become the world's largest aluminum and alumina producer, producing 4 million tons of aluminum and 11 million tons of alumina annually.

The recent strikes affecting Guinea's bauxite production, along with RUSAL's moves, have added uncertainty to the bauxite-aluminum market. Considering RUSAL is benefiting from a strike