May 24, 2012 / 5:20 PM / 5 years ago

Trafigura, Ormet in JV to buy aluminum assets

NEW YORK/GENEVA (Reuters) - Trafigura TRAFGF.UL and U.S. aluminum producer Ormet Corp ORMT.PK have formed a joint venture to buy bauxite, alumina and aluminum projects, they said on Thursday, as the Swiss trading house looks to build its physical presence in the aluminum market.

Trading houses like Trafigura and rival Vitol, traditionally the middle men on global sales, are looking to acquire physical assets like aluminum smelters as trading profits shrink and stricter derivatives regulations loom.

Any future acquisitions would also cement Trafigura's position in the 40 million tonne per year aluminum market, which is dominated by Glencore (GLEN.L) and large producers Alcoa (AA.N), Rio Tinto Alcan (RIO.AX)(RIO.L) and United Co Rusal (0486.HK)RUA.PA.

For its part, Ormet, a small producer in the global market with capacity to produce about 250,000 tonnes of aluminum a year, has secured a partner with deep pockets to expand as the majors have put high-cost, underperforming assets under review.

"We've agreed this venture at a crucial time for the global aluminum industry. Although this sector continues to grow, some of its major players are divesting non-core assets," Trafigura director Simon Collins said in a statement.

Ormet operates an aluminum smelter in Hannibal, Ohio, and in March reopened its alumina refinery in Burnside, Louisiana, which was closed for five years due to low alumina prices. Alumina is a key ingredient for making aluminum.

"This is taking Trafigura from pure trading to investing and doing what they do in other commodities. Ormet has been looking for a new partner," said a trader who used to work for Trafigura.

The partnership combines Ormet's knowledge of running plants and Trafigura's trading know-how and financial clout.

Ormet Chief Executive Mike Tanchuk and Trafigura management grew close as a result of the sale of Ormet's Burnside bulk terminal in Louisiana last year to the trading house for $28 million, a source said.

Trafigura already provides services for Ormet's alumina refinery at the Louisiana site. Ormet did not return calls for comment. A Trafigura spokesman declined to comment beyond the statement.

Recovery

The deal marks a turnaround for Ormet as it has tried to recover from a dispute with long-time partner Glencore that almost closed the smelter in 2009.

Ormet sued its Swiss partner for breaching a tolling agreement after it stopped delivering alumina at the height of the global economic crisis.

Under the tolling deal, Glencore would supply alumina to Ormet, which would sell the aluminum metal produced back to its partner. Without crucial raw material, Ormet's Hannibal smelter almost shut.

Ormet won the arbitration that followed, and the tolling agreement continued until March of this year. It also had a similar tolling deal with Trafigura.

Both tolling agreements ended in March when the company restarted its Burnside alumina refinery. The plant has capacity of 540,000 tonnes per year of alumina, which would be enough raw material to produce about 270,000 tonnes per year of aluminum.

The joint venture will not affect the commercial marketing agreement it has with Glencore. Ormet sells a large portion of its output to the Swiss trading house as part of a three-year deal signed late last year that came into effect last month.

It also sells metal to Trafigura, according to traders.

Upstream, Downstream

The search for possible investments comes after rumors over the past year that Tanchuk wanted to expand Ormet through acquisitions.

But he may have lacked the financial fire power, market participants have said.

With producers scrutinizing their higher cost assets and prices below or close to many producers' break-even level, there will be opportunities.

"There are some distressed assets out there. It's going to be stuff that the majors are divesting," said the aluminum trader.

Aluminum prices on the London Metal Exchange have fallen almost 30 percent to below $2,000 per tonne and traders have said spot alumina has slumped to close to $300 per tonne from around $400 last year.

Rio Tinto put 13 aluminum assets on the block last October, just four years after buying Alcan in the sector's largest deal ever.

It is close to selling four non-metallurgical alumina assets in Europe, which would not suit Ormet's needs, but has said it may spin off its Australian and New Zealand aluminum business.

There could be opportunities closer to home, with Rio reviewing its higher-cost Sebree smelter in Kentucky.

The partners may also look upstream at bauxite and alumina, an LME trader said. Its bauxite supply agreement used to feed Burnside will expire this year.

Editing by James Jukwey, Gary Hill

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