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. Last Updated: 07/27/2016

Aluminum Firms Eye Kiev Stake

Russia's major aluminum smelters are considering creating a consortium to bid for a stake in Ukraine's Mykolayiv alumina plant, with details likely to emerge next week, a source close to the consortium said Thursday.

Alumina is the key raw material used to produce aluminum.

"Krasnoyarsk, Bratsk, Novokuznetsk and Volgograd [aluminum smelters] have voiced their intention to take part in the consortium to privatize Mykolayiv," the source said. "The creation may be announced next week."

The source said the consortium intends to acquire 31 percent of AT Mykolayivski Hlinozemny Zavod, which has a production capacity of 1 million metric tons of alumina per year and accounts for 20 percent of the Russian market.

Analysts said the Russian smelters interest in the Ukrainian plant reflects their need to secure vital supplies of the raw material, which is not produced in sufficient quantities inside Russia itself.

"This is a normal, logical decision," said Konstantin Chernyshev, senior analyst at Rinako Plus. "With Russia lacking large capacities for alumina, smelters have to be connected with large producers elsewhere."

Chernyshev said the smelters may have felt the added heat of an upcoming government crackdown on tolling contracts, under which aluminum enterprises earn a flat fee to process alumina supplied by outside agents, who then export the finished product to world market without paying value-added tax.

Tolling provided smelters with much needed work at a time when the Russian industry was economically crippled, but the government has decided to end the VAT exemption with the new year.

"[Russian] companies now seek long-term and direct contacts with alumina producers," Chernyshev said.

Also, smelters may be joining forces to ensure no single company gains a lock on the scarce alumina supplies, said Andrei Kozlov, a metal analyst at Aton Capital Group.