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. Last Updated: 07/27/2016

Smelters Want to Sever 'Tolling' Ties to West

Russian metal producers' hopes of loosening ties with major Western trading houses are likely to be dashed on the rocks of cash shortages and high borrowing costs, traders and analysts said Thursday.


Russia's giant smelters said they wanted federal subsidies to reduce their dependence on tolling deals under which they take metal ores from international traders, process them and give them back to the traders for export onto world markets.


"The aluminum industry of Russia is now so integrated with the Western trading system that I think these tolling arrangements will continue," said Boris Arlyuk, an independent analyst in St. Petersburg.


Vsevolod Generalov, chairman of the Association of Russian Metal Exporters, said the exporter group would appeal to President Boris Yeltsin to give producers tax and other breaks needed to stand on their own feet.


Analysts say tolling deals have saved cash-strapped metal producers from going under during Russia's traumatic shift away from centralized support towards a market economy.


Russia's giant metal plants have been unable to raise cash to buy raw materials and have instead relied on tolling, which does not require up-front cash payments for supplies.


While Russian producers now want less tolling and, consequently, a bigger slice of hard-currency earnings on refined metal sales, they are unlikely to find the cash to do so.


"I think the current [tolling] system will continue simply on the basis that the Russian base metal smelters do not have much [financial] leverage," said Raj Kohli of Paribas Capital Markets in London.


The stakes are high. The Russian metals export business was worth $16 billion in 1996, Generalov said.


Some analysts say tolling alone is a $2 billion-a-year business for the Western commodities houses that provide ores and concentrates.


With Russian interest rates at about 60 percent, Western trading firms can more easily afford to borrow money, according to Arlyuk. "On average [Russian] smelters only have around half the working capital they need to process ores," he said.


In cases where Western firms have bought stakes in Russian plants, severing tolling ties could be fatal.


"One factor is who owns shares in the plants. If it is a Western trading company then there is no chance [of reducing dependence on tolling arrangements]," said a Moscow-based trader at a Western metals firm.


London-based Trans-World Metals, Glencore AG of Switzerland and others have big equity stakes in Russian aluminum smelters.