* Trafigura, Traxys in the running for zinc offtake deal with Nyrstar
* Deal could cost them about $700 million a year at current prices
* Deal seen as rare, long-term opportunity to secure zinc volumes
By Maytaal Angel and Susan Thomas
LONDON, Nov 12 (Reuters) - Commodity traders Trafigura and Traxys are in the running to take over an exclusive deal to buy about $700 million a year worth of zinc from world No. 1 producer Nyrstar, trade sources said.
Glencore, the current holder of an offtake deal for 350,000 tonnes a year of European zinc, has offered to end the agreement to win EU approval for its takeover of Xstrata .
This has opened up a rare opportunity for the rival traders, both with big balance sheets, if they can secure satisfactory terms.
“It’s Trafigura and Traxys, those two are in the frame,” said an industry source.
Trafigura and Traxys, contacted by Reuters last week, said they do not comment on market speculation. Nyrstar, contacted by Reuters, also said it did not comment on market speculation. Glencore declined to comment.
The zinc offtake deal is worth about $700 million at current prices, making Trafigura, the world’s No. 2 zinc merchant after Glencore, an able potential buyer, three separate trade sources told Reuters.
Trafigura was sidelined in 2008 when Nyrstar picked Glencore as offtake partner for its Australian zinc, and traders say it is keen to make up lost ground against Glencore.
Traxys also has compelling reasons to covet the deal, industry sources said.
“I’ve heard there’s a lot of interest (from Traxys); that is clear. For Traxys, Nyrstar is part of an old family, so I wouldn’t be surprised,” said a second industry source. “Traxys distributing Nyrstar zinc would be a natural move.”
Traxys was created after zinc producer Unicor merged with Zinifex to form Nyrstar, spinning off its trade arm Sogem in the process. That trade arm in turn merged with Arcelor Trading to form Traxys.
EU competition authorities will decide on Nov. 22 whether Glencore’s offer to divest the Nyrstar offtake deal is enough to allay regulatory worries over the $33 billion merger with Xstrata.
A combined Glencore-Xstrata would hold an estimated 50 percent of the European zinc metal market if the Nyrstar offtake were included.
At first glance, a deal to buy 350,000 tonnes of zinc per year, or around a third of Nyrstar’s total annual production, does not look particularly alluring, given that the International Lead and Zinc Study Group expects a market surplus of 290,000 tonnes next year.
Inventories also are at a record high of 1.16 million tonnes of the metal stored in warehouses monitored by the London Metal Exchange (LME).
But much of that metal is held by banks and trade houses as collateral for financing deals or stuck in backlogged warehouse locations, creating an artificial shortage that has underpinned the benchmark LME price and kept premiums paid to secure delivery of physical zinc at relatively high levels.
Some analysts also expect demand will start to rise again next year for the metal, which is used to galvanise steel, as the construction industry recovers in the United States and China starts spending on infrastructure projects.
This would sweeten the appeal of the deal, which Glencore only last year extended until 2018, making it unlikely that Nyrstar will have difficulties in finding a substitute partner.
“It’s not often that the opportunity to direct 350,000 tonnes of zinc comes up in the market and in a single go, and it’s a long-term opportunity,” said Macquarie analyst Duncan Hobbs.
Any successor will need deep enough pockets to cope with the terms, however. Glencore has to buy Nyrstar’s special-high-grade (SHG) and continuous grade galvanizing (CGG) zinc at an agreed annual premium over the LME price.
“What you need ideally is a big balance sheet and as low funding costs as possible,” Hobbs said.
Trafigura has annual revenues of more than $122 billion, according to its website. It also has 81 offices worldwide, which operate in 15 global commodity markets, giving it economies of scale and other efficiencies that are comparable with Glencore‘s.
By contrast, Traxys has annual turnover of approximately $5 billion, according to its website, with over 20 offices worldwide including six in Europe.
“I know Traxys is very strong, but I don’t know if it’s strong enough for that (deal),” the second industry source said.
Nyrstar is unlikely to decide to market its own zinc since it disbanded most of its marketing and sales network when it clinched the Glencore offtake deal.
“I think the working capital implications and the sales, marketing and administration costs of taking this volume back onto its own books would be a tough ask for Nyrstar,” Hobbs said.
He explained: “Glencore was probably paying more promptly than end-consumers are willing to pay, so (Nyrstar‘s) working capital is reduced. And if Nyrstar are selling to one customer, they need far fewer people to manage this.”