Russians to restart aluminium smelter: the mothballed Aluminium Smelter Company of Nigeria plant is due to reopen this month on the back of investment by Russia's United Company, the world's largest aluminium producer. Neil Ford reports

African Business, Jan, 2008 by Neil Ford

The Aluminium Smelter Company of Nigeria (Alscon) was built in 1997 at a cost of $2.5bn but closed after just two years and has remained out of operation, until now. Abuja hopes that Russia's United Company (Rusal) management will provide a boost to Nigerian industrial capacity, by providing aluminium for both the domestic and export markets.

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Rusal bought a 77.5% stake in the plant in February 2007 for $250m, after a two-year privatisation process overseen by the government of President Olusegun Obasanjo. The government has retained a 15% share in the venture, while the remaining 7.5% equity has been bought by Ferrostaal AG of Germany.

Given the original construction costs of the formerly state owned project, this may seem a poor return on investment but the smelter generated no income and was gradually decaying as it lay idle. Apart from the smelter, the consortium also acquires a port on the Imo River and a power plant to provide reliable electricity to the energy hungry smelter.

In addition, the Russian firm is to spend $150m on rehabilitating the smelter between its purchase a year ago and the start of 2010. Rusal will begin production at a lower rate and gradually ramp output up over time. Speaking in November, Rusal's director of international special projects, Alexandr Livshits, said: "Right now, we are modernising the equipment. We will start the plant in January and increase production step by step until we reach full capacity."

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Rusal is already active in Guinea, where it mines bauxite and processes it into alumina. It managed the Alumina Company of Guinea (ACG) before buying it in April 2006 but it is not yet known whether Guinean alumina will be used at the Nigerian plant.

The Alscon plant has a production capacity of 193,000 tonnes a year but is understood to have produced just 40,000 tonnes under state control before it was closed down in 1999. The main reasons given for the company's failure were a lack of working capital, high production costs, poor gas supply and complicated sea access.

Cost-reducing experience

The new owners should be able to overcome the first two of these difficulties by having a far stronger economic base and more experience in reducing operating costs. In addition, the Nigerian gas sector has been transformed out of all recognition over the past nine years; new transmission pipelines are transporting gas from various associated and non-associated gas fields to power plants and industrial concerns. In addition, the new government of President Umaru Yar'Adua is committed to ensuring that the needs of domestic gas consumers take priority over exports.

The sale of the Alscon smelter has proved almost as difficult as its first incarnation. It was originally privatised in 2004 before the sale collapsed when the selected buyer failed to come up with a 10% deposit on the $410m purchase price.

Even the second, successful tender process was somewhat confused, as Rusal was initially disqualified from bidding, before the government changed its mind. The final decision to award the project to the Russian company was further delayed by prolonged discussions with the federal government. It was originally hoped that the scheme, which is based in Akwa Ibom state in the Niger Delta, could have been opened earlier but redevelopment work was delayed by the kidnapping of six Russian workers for two months.

There has also been a dispute with local people over the impact of dredging work on river fish stocks. Alumina needed for aluminium production will be imported via the River Imo and finished aluminium will be exported via the same route, so Rusal needs the river to be navigable for large vessels.

Delays in carrying out this work in the 1990s hampered the operations of Alscon as a state run entity. However, following talks between Nigerian officials and Livshits in November, an 11-month dredging programme is to begin during the first quarter of 2008. Livshits commented: "We can expand the plant's production capacity faster as soon as we resolve the problems with the local communities."

When accompanying the federal Nigerian minister of state for mines and steel, Alhaji Ahmed Gusau, on a tour of the revamped plant, Andrey Partyanskly, the acting managing director of Alscon, said: "I want to assure you that everything was being done to put Alscon into production as quickly as possible. Your visit is a clear demonstration of the federal government's resolve to revive ailing industries in the steel sector."

Partyanskly added that although the smelter was now largely under foreign ownership, it should create plenty of employment. According to a Rusal statement: "Once the smelter goes on line, it will create 1,900 local jobs and 90% of the employees will be Nigerian citizens. Additionally, 20,000 jobs will be created through the development of infrastructure around the smelter, resulting in a positive improvement in the standard of living for Akwa Ibom state residents."

Aluminium production capacity costs about $4,000 per tonne to construct, so Rusal seems to have struck a good deal by paying roughly 30% of this figure. Yet given that the Alscon plant was not operational when it was bought, it is virtually impossible to argue that Nigeria has received the bad end of the bargain. Despite some real economic improvements over the past few years, the West African state is still considered a risky bet outside of the oil and gas sector by most international investors. Abuja has had trouble convincing industrial producers to set up operations in the country. If Rusal makes a success of its new aluminium plant then it could help to build confidence in Nigeria as a secure destination for foreign direct investment (FDI).