Thread Content
Xiao Yaqing: Strategic solutions to overcome difficulties. With a net profit drop of nearly 70%, China Aluminium’s poor half-year results reflect the situation faced by most domestic companies during the first half of this year. As the head of this large state-owned enterprise, what strategic measures does Xiao Yaqing have to help China Aluminium get out of these difficulties? Shanghai, Pudong, September 1, 2008. In the Century Hall of the International Conference Center, a distinguished man seated right at the center of the main stage was calmly answering reporters’ questions; yet, despite the smile he tried to maintain, his furrowed brows could not be concealed. The main figure at this performance report meeting is Xiao Yaqing, the chairman of Chalco Co., Ltd. Xiao Yaqing had furrowed his brows because China Aluminium’s semi-annual report for the first half of 2008 was not very promising. As the head of a large state-owned enterprise that ranked 31st among China’s top 500 companies in 2008 and 46th among the 100 most valuable listed companies in 2007, it was only natural that he was not in a good mood. According to Chinalco’s interim financial report for 2008, the company achieved operating revenue of 39.6 billion yuan in the first half of the year, a decrease of 7.14% on a year-on-year basis; its net profit was 2.4 billion yuan, a drop of 65.56% compared to the previous year. Xiao Yaqing explained to the shareholders that the company’s two main products, alumina and electrolytic aluminum, were under pressure from rising costs and falling market prices, which were the main reasons for the decline in performance. In addition, Chinalco’s interim report attributed the decline in performance to rising sales and financial costs, as well as the impact of the snow disasters at the beginning of the year. Internal and external challenges: It’s not just China Aluminium Corporation that is facing declining performance. Li Rongrong, head of the State-owned Assets Supervision and Administration Commission, revealed figures at a meeting for senior officials of state-owned enterprises on July 22: In the first half of 2008, these state-owned enterprises achieved total operating revenues of 5,765.03 billion yuan, a 25.7% increase compared to the previous year, with the growth rate being 5.4 percentage points higher than in the same period the previous year. However, the downward trend in profits was concerning, with a 10.3% decline. A survey conducted by the State-owned Assets Supervision and Administration Commission on key issues affecting 410 state-owned enterprises showed that over 95% of these enterprises believe that the continuous upward trend in prices of energy and raw materials, including oil, coal, natural gas, chemical raw materials, electricity, and iron ore, has become an important factor affecting their economic performance. According to statistics from the State-owned Assets Supervision and Administration Commission, in the first half of the year, the increase in costs and expenses of central state-owned enterprises was 3.9 percentage points higher than the increase in their operating revenue, which represents an increase of 2.8 percentage points compared with the first quarter. As Chairman Xiao Yaqing said, rising costs and falling sales prices are the main reasons behind the significant decline in China Aluminium’s performance. Data shows that the prices of China Alumina’s two main products, alumina and electrolytic aluminum (also known as primary aluminum), have both experienced significant drops. The external sales price of alumina by Chinalco is around 2,830 yuan per ton, down by 134 yuan per ton from last year’s level of 2,964 yuan, representing a decline of 4.52% ； The external sales price of electrolytic aluminum was 16,241 yuan per ton, which is 972 yuan per ton lower than the 17,213 yuan per ton in the same period of 2007, representing a decline of 5.64%. At the same time, the unit production cost of alumina has risen due to the sharp increase in fuel, power, and bauxite prices, eroding profits. A research report prepared by Galaxy Securities predicts that rising fuel costs have increased the cost of alumina by approximately 150 yuan per ton ； The increase in costs resulting from rising bauxite prices is about 160 yuan per ton. Due to rising electricity prices and the costs of manufacturing anode carbon blocks, the production cost of electrolytic aluminum has increased significantly. Galaxy Securities predicts that in 2008, the production cost of electrolytic aluminum at Chinalco will increase by about 5% compared to the previous year. Similarly, in a report providing an outlook on Chalco’s medium-term performance, CICC noted that the gross profit margin of the aluminum electrolysis industry would decline further in 2008. The oversupply in this industry meant that rising costs for energy and raw materials could not be passed on to prices. The growth rate of demand for aluminum electrolysis was significantly lower than expected, and there was still a large amount of new production capacity, all of which put downward pressure on aluminum prices. Meanwhile, as the import prices of bauxite, shipping costs, coal prices, and other raw materials for production continue to rise, the gross profit margins of domestic alumina plants will be further squeezed. Since the beginning of this year, the growth rate of industries that use aluminum, including those in real estate and the automotive sector, has slowed down significantly; as a result, domestic consumption of primary aluminum increased by only 11% in the first four months. The expansion rate of domestic primary aluminum production is still accelerating; it is estimated that 3.2 million tons and 2.3 million tons will be added in 2008 and 2009 respectively. By the end of 2009, China’s primary aluminum production capacity was expected to exceed 20 million tons. Due to slowing consumption and rapid capacity expansion, the global primary aluminum market is expected to remain in a state of surplus over the next two years, which will limit the potential for increases in aluminum prices. Taking into account factors such as the appreciation of the RMB, the projected domestic aluminum prices for 2008 and 2009 are 18,850 yuan per ton and 19,000 yuan per ton respectively, representing a decline of 3.1% and an increase of 0.8% on a year-on-year basis. Ways out of the predicament It is obvious that Xiao Yueqing, who has great ambitions, will not sit idly by; instead, he will take proactive actions. Based on the information provided in the annual report, Chinalco has identified five ways to overcome its difficulties, with these five methods being sequential and complementary to one another. Firstly – strengthen resource security. Faced with an increasingly competitive bauxite market domestically and rising bauxite prices, Chinalco is making every effort to accelerate the construction of mines, increase the procurement and production of ore, make coordinated arrangements, optimize the allocation of resources, further improve the efficient use of raw materials, and enhance the reliability of supply as well as the level of comprehensive resource utilization. The proportion of self-mined ore in the first half of the year increased by 5 percentage points compared to the same period last year ； Obtained 7 mining rights for bauxite, with 10 million tons of bauxite resources ； The ongoing mining projects will restore and add 3.42 million tons of capacity for processing bauxite in-house. Secondly – improve the industrial chain and enhance resilience to risks. At the end of May 2008, Chinalco completed the acquisition of 5 aluminum processing enterprises and 1 aluminum electrolysis enterprise within the group. This acquisition not only reduces related-party transactions with the controlling shareholder and mitigates competition within the same industry, but more importantly, by acquiring aluminum processing assets, Chinalco has been able to improve its industrial chain, moving toward mitigating industry cycle risks and enhancing its overall competitiveness. At the same time, by taking a stake in the \"large aircraft\" project, it is ensured that the sales volume and profits for the products from the newly acquired aluminum processing industry are secured in advance. Third – Further implementation of the large-scale resource strategy. Since the end of 2003, Chinalco has expanded its activities to include other non-ferrous metals, transforming itself from a pure aluminum giant into a company that operates equally well in both aluminum and copper industries, with no rival in China. At the same time, Chinalco also actively developed rare and precious earth metals; it acquired Shaanxi Nonferrous Metals and formed a joint venture with the British company Aray to become the leader in the molybdenum and titanium industries. In August 2007, Chalco acquired the Canadian Peruvian copper mine with reserves of 12 million tons ； In October, it acquired Yunnan Copper Industry (000878, stock forum) with reserves of 7.6 million tons. The combined reserves of the two amount to about 20 million tons, making Chalco the largest copper reserve holder in the country. When acquiring Yunnan Copper Industry, Xiao Yaqing said in Kunming that Chalco would accelerate the development of copper resources, aiming to reach a reserve volume of 30 million tons within the next 5 years. Today, it was further reported that Chalco has signed an agreement with the Russian mining company AricomPLC to jointly establish a sponge titanium factory in Heilongjiang; this agreement has been approved by the Chinese authorities. Aricom and Chalco will hold 65% and 35% of the shares in the plant respectively, with both parties investing 474.5 million yuan and 255.5 million yuan respectively. Kuranakh titanium ore in Russia, owned by Aricom, will become the exclusive supplier of titanium ore for this plant, while Chinalco will purchase the sponge titanium products produced there. Aricom was established in 2003 by the Russian gold producer PeterHambroMining. Aricom holds a 49% stake in the development project of the Bolshoi Seym deposit in Amur Oblast, Russia, which contains ilmenite and magnesite. The joint venture titanium sponge factory will be located in Jiamusi City, Heilongjiang Province. Its initial annual production capacity will be 15,000 tons of titanium sponge, with this capacity to be increased to 30,000 tons in the second phase. The plant is expected to come online in 2010. Fourth — continue to actively promote overseas projects. China Aluminium’s overseas projects hold dual significance. The first is to increase its own resource reserves by acquiring overseas projects; for example, the acquisition of the global mining giant Rio Tinto and the copper mines in Peru served the same purpose ； The second approach is to relocate high-energy-consuming industries to regions rich in energy abroad, thereby reducing costs and alleviating the pressure on listed companies. On May 9, 2008, Chinalco ** Co., Ltd., a subsidiary of China Aluminium Corporation, signed a joint venture agreement with Malaysia Mining International Holdings Bhd. (MMC) and the ** Group of the Kingdom of Saudi Arabia (SBG). Under the joint venture arrangement, the joint venture company will develop and operate an electrolytic aluminum plant with an annual production capacity of around 1 million tons, along with its own power plant, in Jazan Economic City, Saudi Arabia. The planned capacity of the aluminum electrolysis plant is 1 million tons of aluminum electrolysis per year, to be built in three phases ； The planned capacity of the captive power plant is 1.860 MW. The total investment required for this project is estimated to be around $4.5 billion. The company plans to hold 40% of the shares in the aluminum smelting plant and 20% of the shares in the power plant, thereby becoming the largest shareholder in the aluminum smelting project and the third-largest shareholder in the power plant. Finally — by utilizing low-cost direct financing instruments, it is possible to obtain substantial amounts of capital at low costs for business development, and at the same time optimize the debt structure to reduce financial costs. On May 22, 2008, Chinalco received approval from the National Association of Interbank Market Traders of Bank of China (601988) to issue medium-term notes in China with a total amount not exceeding RMB 10 billion. On June 4 of the same year, it successfully issued bonds worth RMB 5 billion, raising RMB 4.955 billion in cash, at an annual interest rate of just 5.30%. Between February and July 2008, Chinalco issued more short-term financing bonds in China, with denominations of 2 billion yuan and 3 billion yuan respectively. It raised 1.992 billion yuan and 2.988 billion yuan in funds. The coupon rates are only 4.99% and 4.83%. Although these 5 strategies put forward by Chinalco have not shown any tangible results so far, they are indeed worth expecting. If, over time, Chinalco is able to regain its former success of doubling profits and seeing its stock price increase by a factor of 10, then these 5 strategies deserve to be promoted among all Chinese companies.