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Chinese-owned Zhongwang USA enters US aluminium market with Aleris buy
[NEW YORK] Zhongwang USA, backed by Chinese aluminium magnate Liu Zhongtian, said on Monday it would buy US aluminium company Aleris Corp in a bet by the billionaire that the nascent US automotive aluminium sector will be the industry's next big growth market.
The US$2.33 billion deal comes as Mr Liu and Zhongwang International Group, the parent of Zhongwang USA, are embroiled in a dispute over US import duties amid broader trade tensions between the US aluminium industry and China.
It marks the biggest entry by a Chinese company into the US aluminium industry since trade tensions began ramping up in recent years.
Zhongwang International is parent of China Zhongwang Holdings, the world's second-largest producer of aluminium extrusions. It has been accused of evading US import duties on extruded products, prompting an investigation by the US Department of Commerce (DOC).
The acquisition has strategic importance because Aleris is in the midst of a US$350 million expansion of its Lewisport, Kentucky rolling mill to produce automotive body sheet for US auto manufacturers. It hopes to produce 200,000 tonnes per year and begin shipping in 2017.
Mr Liu said in a statement that Aleris is "well-positioned to capitalise on the positive demand trends we see globally."
Auto manufacturers like Ford Motor have been moving toward aluminium, 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 and Apollo Management 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 US 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.
Mr Stack said the two parties have not yet gotten into the details of how they might collaborate.
Extrusion is the process of shaping aluminium 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, Boeing and Airbus Group SE.
Zhongwang USA is majority-owned by Mr Liu, China Zhongwang's founder. He has a net worth of US$3.1 billion, according to Forbes. The company will pay US$1.11 billion in cash and take on Aleris's US$1.22 billion in net debt.
Upstream smelters and downstream extruders in the United States have both argued that subsidised Chinese aluminium production has depressed global prices and presented unfair competition.
China Zhongwang - the subsidiary that is not the purchaser of Aleris - is the subject of an ongoing investigation by the US Department of Commerce (DOC) into allegations from industry group the US. Aluminum Extruders Council (AEC), that the company evaded US import tariffs on aluminium 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 is not owned by China Zhongwang, but the two are related through Zhongwang International and Mr Liu.
Mr Stack said Zhongwang had assured Aleris that it denies the allegations and was cooperating with the DOC to resolve the case. He emphasised that the two were separate companies despite the link to Mr Liu.
"This helps them move beyond that with very significant investment and exposure to the US market," Mr Stack said, referring to the trade case. "Aleris' position doesn't change - we support free and fair trade with a level playing field."
Mr 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," Mr 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.