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. Last Updated: 07/27/2016

Glory Days Fading for Trans-World




The fat years appear to be over for Trans-World Group, a British metals firm that has dominated the Russian metals market since the collapse of the Soviet Union.


The company has lost control over parts of its once mighty metals empire and is under attack by Russian financial groups. Late last year, Trans-World lost board control of the huge Novolipetsk steel mill and with it control of the rights to market the plant's production.


Last month, Trans-World's Kazakh partners canceled management contracts that the London-based firm had won to run several big metals plants there.


The Kazakhs accused Trans-World of mismanaging the enterprises and non payment of taxes. But Trans-World, which says it has invested $750 million in the plants, has lodged protests in European courts and recently won an order in a Dutch court to seize some Kazakh metals in Rotterdam.


The attacks are an indication that the company is being squeezed out of its dominant position in the former Soviet Union's metals market, said Svetlana Smirnova, a metals analyst with the United Financial Group.


"The first indication of this was Novolipetsk, when the management, which had supported Trans-World for two years suddenly decided to switch sides," Smirnova said. "Apparently this process is now spreading to Kazakhstan."


The State Duma's security committee recently launched an attack against Trans-World, alleging its director, Briton David Reuben, was a spy and demanding the Interior Ministry investigate into the company's activities, Kommersant Daily newspaper reported Tuesday.


Trans-World, which has traded metals since 1977, took only four years to gain control of 40 percent of Russia's aluminum industry as well as big stakes in ferrous metals. Reuben built up the company from 1992 to 1996 when Oleg Soskovets ran the metals industry as deputy prime minister.


The company says it expanded into Russia because it was willing to offer capital at a time when no one else would. Trans-World approached companies close to bankruptcy and offered tolling deals, providing smelters with raw materials, paying them a low fee for processing and then exporting the finished product for sale on world markets.


Trans-World purchased shares in the Bratsk, Krasnoyarsk and Sayansk smelters, three of the world's largest, using its position to fend off competitors which also might be interested in signing tolling deals.


This gave Trans-World control over Russia's huge aluminum industry, which is the world's largest exporter with 2.44 million tons, or 85 percent of its output, going to world markets. About 70 percent is still financed by tolling deals.


But the political climate has changed: Soskovets lost his job in 1996. And competition for control of the sector has intensified, fueled by forecasts of higher world metals prices this year. Earnings in the sector will also be boosted by a growth in demand from domestic manufacturing.


One major competitor is Uneximbank which is part of the group that pushed Trans-World out of Novolipetsk. Trans-World also complained bitterly that Uneximbank was favored in an auction last summer for a big stake in the Norilsk Nickel plant.


Trans-World may now be looking for allies. After the Novolipetsk defeat, Trans-World announced a "strategic partnership" with the Rossiisky Kredit group, transferring its shares in the mill to the bank.


Rossiisky Kredit has a range of metals holdings, including control of the Lebedinsky metals plant and a stake in the Krasnoyarsk Aluminum Plant.


Other than competition from banks, Trans-World also could suffer from government plans to wean Russia's smelters away from tolling, although the government extended favorable tax treatment on tolling until the end of this year.


James May, a metals analyst with the London-based Metals Bulletin Research, said the arrangement with Trans-World had previously fulfilled Russian smelters' needs to keep producing and pay wages. But the environment has changed.


"Now, the Russian aluminum industry is looking to move on, seeking better technology and more sophisticated production," May said. "This requires large capital investment, which trading companies as well as Russian banks are able to provide."


James Viciani, Trans-World's director for alloys operations, described his company as "a victim of success." People are trying to reap the results of our hard work without having earned it," Viciani said in a telephone interview from London. "We were able to do something successfully, and others wish to take that away."


Viciani said Trans-World does not intend to lag behind. The company has plans to move beyond primary metals production into manufacturing finished goods such as foil and aluminum parts, targeting sales for the growing automotive sector.


But analysts say the winds appear to have turned against Trans-World, which will need to garner some more local support if it is not to lose more ground.


"I think they are going to lose in the battle that is ahead," Smirnova said.