Will Aluminij Mostar survive?

Will Aluminij Mostar survive?
The Millennium Photograph of Aluminij was taken on 18 October 2006 by famous Croatian artist Šime Strikoman. From a height of 35 meters, Strikoman recreated the company's logo by assembling 700 employees. Aluminij Mostar

Aluminij Mostar d.d., an aluminium smelter based in Bosnia & Herzegovina, celebrated this year twenty years since restarting production in 1997, after being severely damaged in the Bosnian war (1992-1995). But few had any reason to be cheerful: the smelter is going through an existential crisis that could very well seal its fate. Blighted by what is Europe’s highest electricity price, crippled by mounting debt and faced with declining appetite on the part of the Bosnian government to further support the plant, will Aluminij survive its bleakest moment since the Bosnian war?

The company’s new management (appointed in September 2016) has been trying hard to reverse course. Among the most important measures taken was the signing a new electricity supply contract for 2017 with the federal electricity distributor Elektroprivreda BiH at favourable “market prices” of under €40/MWh (including transmission costs) that would have saved the company over €10 million per year. The contract was a key step in reining in rampant debt, which had reached 185 million Bosnian marks (€95 million) for electricity bills alone, out of total debt of around 250 million Bosnian marks (€128 million). As a point of reference, Aluminij accounts for 18.5% of Bosnia & Herzegovina total electricity consumption – and recently celebrated the production of 3 million tonnes of aluminium since it started production in 1981.

However, due to unfavourable hydrological conditions in the region and rising electricity prices, Elektroprivreda BiH had to terminate the supply contact with Aluminij this summer. The electricity is now imported from surrounding countries, pushing Aluminij’s tariffs to over €50/MWh. The smelter holds once again the ignoble distinction of paying the highest electricity prices among European aluminium smelters.

The effects have been devastating: despite high aluminium prices, Aluminij registered a monthly operating loss of around 3 million Bosnian mark (€ 1.54 million) in August due to electricity prices. Since similar monthly losses are expected for the reminder of the year, which will lead to the company notching up its fifth consecutive year in the red (and the eighth out of last nine). Moreover, at the end of this year accumulated loss will have exceeded core capital, according to general director Mario Gadžić.

Two companies provided most of the cash (or financial assets) to keep business operations going. Glencore plc supplies the smelter with alumina, shipping in return around 50% of Aluminij’s production. Another 20% of its production is sold to a locally-registered company, Prvo Plinarsko Društvo. The rest of its production (some 30%) is sold locally but mostly exported, after processing by local firms.

The smelter produced 106,500 tonnes of primary aluminium in 2016 (75% of capacity), mostly in the form of billets (71,500 tonnes), slabs (18,000 tonnes) and ingots (13,700 tonnes). The net loss for the year amounted to €21.8 million. Counting on lower electricity costs and profits from high aluminium prices, Aluminij had planned a series of investments: a new line for wire production, new high pressure casting equipment and eventually a new anode plant, as well as reaching full capacity of 133,000 t/year by the 3rd quarter 2018. The investment for restarting 64 idled pot cells (25 % capacity) was estimated at €7 million. The first pot cells were restarted in April, and the process was supposed to be completed by September 2018.

However, at current electricity costs, it is highly unlikely that these moves will be implemented. Only production increases at the cast house remain an option after the expected tax-free imports of unalloyed aluminium ingots start in January 2018.

Efforts to survive

But Aluminij is still fighting to survive. So far, the company:

  • Unblocked the payments account (blocked by creditors). The company is under constant threat by creditors.
  • Revised procurement and sales lists, existing agreements and debtor-creditor relations, contract by contract in order to improve Aluminij’s profitability and efficiency. Before the revision, 77% of its production was sold below the market price, the new management claimed.
  • Re-established long-term business relations with the Croatian rolling mill TLM Šibenik after the Slovenian company Impol d.o.o. took over the management at TLM and restarted production last year.
  • Hedged 50% of its aluminium sales and 40% of expected alumina purchase for the year.
  • Restructured nearly €40 million of short-term obligations.
  • Started a €1 million project, installing a gas system in the anodes plant and the cast house.
  • Persuaded the Federal government to remove a 4.5% import tax on unalloyed aluminium ingots. By remelting imported aluminium ingots, Aluminij plans to increase production capacity by an additional 25%, employ 30 more workers and increase exports by € 50 million. At the same time, this would significantly reduce production costs since ingots would be remelted in the cast house’s ovens by using natural gas as a fuel, instead of electricity. The cast house’s capacity is 160,000 tonnes.
  • Finally, the new management succeeded in persuading the Federal government to delay the sale of its 44% share in Aluminij Mostar, initially planned for early 2017.

Breaking the deadlock

Nevertheless, without the urgent recapitalization of the smelter or the government’s efforts to find a strategic partner for Aluminij, the current electricity contract will drain the company dry.

The first privatisation procedure of Aluminij – which took place in 2007 – garnered great interest from foreign investors. Shortlisted bidders included Glencore International AG, Mytilineos Holdings SA and EN+ Group Ltd, but it was Vedanta Resources plc. to come with the most interesting offer. The Indian company put forward €640 million for the 88% stake in Aluminij, including investments in a thermo power plant and a coal mine – the highest price ever offered for a European smelter.

However, the privatisation was cancelled by the Federal government in 2008 due to the world economic crisis.

Since it is highly unlikely that any serious company will show interest for Aluminij until electricity costs are reined in, the only solution to avoid imminent bankruptcy, possible closure and unemployment for its 850 workers, is support from the Federal government. Both the government and the management have to be aware that no serious company will come to invest in Aluminij (either as an owner or co-owner) without long-term electricity supply contracts at favourable prices and the without writing off existing debt, especially to electricity provider Elektroprivreda HZBiH.

It is not the first time Aluminij finds itself in a bleak situation, but this champion of survival managed to rebound every time. One can only hope that this will be the case this time as well.

(1 euro=1.95583 Bosnian marka)