* Trafigura, Traxys in the running for zinc offtake deal
* Deal could cost them about $700 million a year at current
* Deal seen as rare, long-term opportunity to secure zinc
By Maytaal Angel and Susan Thomas
LONDON, Nov 12 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
"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
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
A combined Glencore-Xstrata would hold an estimated 50
percent of the European zinc metal market if the Nyrstar offtake
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
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
DEEP ENOUGH POCKETS
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
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
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."