Chinese-owned Zhongwang USA enters U.S. aluminum market with Aleris buy

[August 30, 2016]  By Luc Cohen

NEW YORK (Reuters) - Zhongwang USA LLC, backed by Chinese aluminum magnate Liu Zhongtian, said on Monday it would buy U.S. aluminum company Aleris Corp in a bet by the billionaire that the nascent U.S. automotive aluminum sector will be the industry's next big growth market.

The $2.33 billion deal comes as Liu and Zhongwang International Group Ltd, the parent of Zhongwang USA, are embroiled in a dispute over U.S. import duties amid broader trade tensions between the U.S. aluminum industry and China.

It marks the biggest entry by a Chinese company into the U.S. aluminum industry since trade tensions began ramping up in recent years.

Zhongwang International is parent of China Zhongwang Holdings Ltd, the world's second-largest producer of aluminum extrusions. It has been accused of evading U.S. import duties on extruded products, prompting an investigation by the U.S. Department of Commerce (DOC).

The acquisition has strategic importance because Aleris is in the midst of a $350 million expansion of its Lewisport, Kentucky rolling mill to produce automotive body sheet for U.S. auto manufacturers. It hopes to produce 200,000 tonnes per year and begin shipping in 2017.

Liu said in a statement that Aleris is "well-positioned to capitalize on the positive demand trends we see globally."

Auto manufacturers like Ford Motor Co have been moving toward aluminum, which is lighter than steel, to reduce body weight of autos in order to improve gasoline mileage, which will reduce emissions.

Aleris has been owned by a group of funds including Oaktree Capital Management LP and Apollo Management LP since it emerged from bankruptcy in 2010. It has plants in the United States, Europe and Asia and supplies fabricated products to the aerospace, construction, automotive and defense industries.

Sean Stack, chief executive officer of the Cleveland-based company, said the transition to strategic ownership from private equity would allow it to focus on long-term investments in the U.S. automotive market and aerospace market in China "without worrying about the next quarter's performance."

Zhongwang produces extrusions for the automotive sector, and recently built a rolling mill in China for auto body sheet. Stack said the two parties have not yet gotten into the details of how they might collaborate.

Extrusion is the process of shaping aluminum by forcing it to flow through an opening in a die.

Aleris's mill in Zhenjiang, China mainly serves the aerospace sector, and is licensed to supply Bombardier Inc., Boeing Co and Airbus Group SE.

Zhongwang USA is majority-owned by Liu, China Zhongwang's founder. He has a net worth of $3.1 billion, according to Forbes. The company will pay $1.11 billion in cash and take on Aleris's $1.22 billion in net debt.

TRADE DISPUTE

Upstream smelters and downstream extruders in the United States have both argued that subsidized Chinese aluminum production has depressed global prices and presented unfair competition.

China Zhongwang Holdings Chairman Liu Zhongtian toasts during the debut of Zhongwang Holdings at the Hong Kong Stock Exchange May 8, 2009. REUTERS/Bobby Yip

China Zhongwang - the subsidiary that is not the purchaser of Aleris - is the subject of an ongoing investigation by the U.S. Department of Commerce (DOC) into allegations from industry group the U.S. Aluminum Extruders Council (AEC), that the company evaded U.S. import tariffs on aluminum extrusions.

Jeff Henderson, president of the AEC, said on Monday the deal "raises very serious concerns for the entire industry."

China Zhongwang has denied the allegations.

Zhongwang USA LLC is not owned by China Zhongwang, but the two are related through Zhongwang International and Liu.

Stack said Zhongwang had assured Aleris that it denies the allegations and was cooperating with the DOC to resolve the case. He emphasized that the two were separate companies despite the link to Liu.

"This helps them move beyond that with very significant investment and exposure to the U.S. market," Stack said, referring to the trade case. "Aleris' position doesn't change - we support free and fair trade with a level playing field."

Henderson disputed that Zhongwang had been cooperating with the DOC, noting that it had not responded to the department's questionnaires.

"Zhongwang is a state-supported enterprise and has received large benefits and financing from the government of China. Zhongwang also has a long history of circumventing and evading duties in trade cases," Henderson said.

Last year, short-seller Dupre Analytics accused China Zhongwang of doctoring its books, in a report cited widely in the AEC's complaint. The company denied those allegations.

The deal is expected to close in the first quarter of 2017.

Credit Suisse was financial adviser to Aleris, while Moelis & Co advised Aleris on certain aspects of the deal. Zhongwang USA received financial advice from Deutsche Bank and Barclays.

(Reporting by Luc Cohen in New York, Ankit Ajmera in Bengaluru and Josephine Mason in Beijing; Editing by Paul Simao, Marguerita Choy and David Gregorio)

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