Mercuria expands into metals concentrates as oil giant diversifies

By Josephine Mason and Melanie Burton

NEW YORK/SINGAPORE, Dec 12 (Reuters) - Mercuria plans to enter the fiercely competitive business of trading base metals concentrates, the company said, the latest move by one of the world's biggest oil traders to expand into niche commodities markets and challenge bigger, diversified rivals.

Coming after its first foray into physical refined base metals trading 18 months ago, the Swiss-headquartered, privately owned trading house has hired a veteran trader, Jose Leon, to help set up a non-ferrous concentrates desk, three sources familiar with the matter told Reuters.

Leon, who previously worked for MRI Trading AG, the Swiss non-ferrous concentrate trader set up by Marc Rich, the founder of Glencore, will run the lead and zinc book, the sources said.

He will start in January and will be based at Mercuria's Geneva headquarters.

A spokesman confirmed the company will expand into concentrates trading, but declined to comment on the appointment of Leon and plans to hire more traders.

Mercuria will be the first major entrant into the opaque industry since Freepoint Commodities LLC, run by former Sempra head David Messer, bought JPMorgan Chase & Co (NYSE: JPM - news) 's physical metal concentrates business last April (Frankfurt: B2B.F - news) in its first effort to expand beyond energy markets.

Sources expect the company to make more appointments to bolster the team in the new year.

Leon was responsible for zinc and lead trading at MRI and, according to his LinkedIn profile, has 20 years' experience trading metals concentrates. He previously worked for Louis Dreyfus and BHL Resources, among other companies.

The timing of his departure from MRI is not known, but an official at MRI confirmed on Wednesday he no longer works for the firm. Singapore-based logistics firm CWT Ltd bought MRI in 2011.

HARD PUSH

The upstart trading house's latest expansion plan comes after a push last year into hard commodities to compete with its bigger rival, Trafigura, which has logistics, warehousing and trading operations in energy and metals markets.

It now deals in about 1 million tonnes of base metals a year, including 500,000 tonnes of refined copper, 200,000 tonnes of zinc and lead each and 100,000 tonnes of nickel, according to a source familiar with the matter.

Mercuria has grown rapidly since its creation nine years ago, also moving into agricultural products. Merchants are not affected by deeper regulation that has forced many U.S. and European banks to exit physical and futures commodity markets.

Trading of concentrates - ore that has been crushed and milled to remove waste and is used by smelters as raw material to make refined metal - is dominated by some of the largest, privately owned metals houses.

They include Transamine, based in Switzerland; Louis Dreyfus Commodities BV in the Netherlands; and Ocean Partners and Freepoint Commodities in the United States.

Others are also muscling in. Mick Davis, ejected from Xstrata after its takeover by Glencore earlier this year, has set up X-2 Resources, a mining venture which received backing from Noble Group Ltd and private equity group TPG in September.

As agents between mines and smelters, concentrate traders typically fund development mine projects in return for marketing rights of the material once the mine starts producing.

A HIGH BAR

Competition for long-term contracts is also fierce, with many of the major miners, including BHP Billiton (NYSE: BBL - news) , negotiating directly with smelters in China and Japan.

"The barrier of entry into concentrate trading is high. You have to have people with established relationships with the mines and smelters," said a U.S. trader at a rival company.

Rising supplies currently favor smelters, with miners and traders paying them higher treatment and refining charges (TC/RCs) to treat and refine their material.

But it can be a hugely profitable business, particularly as ore quality deteriorates or is increasingly hard to reach at some of the world's biggest mines and new deposits are located in politically unstable countries.

Earlier in the year, a string of mine accidents such as those at Indonesia's huge Grasberg mine and a rockslide at Rio Tinto's operations in Utah unleashed a short-term scramble for concentrate and pushed charges down.