Contents - AL-Tax

11.1 Summary of Key Facts 153SUAL were formed through the consolidation of Russian smelters and CIS refineries.In late 2006, Glencore agreed to merge certain of its alumina and aluminumassets with these entities in exchange for a 12% interest in the resulting combinedcompany (United Company RUSAL). Chinese smelters and refiners combined toform Chalco.11.1.5 Effects of Developments on Trading ActivitiesThe developments described above have had a profound effect on (a) the risks associatedwith merchant trading, (b) trading firms’ capital requirements; and, (c) therange of viable trading strategies. Each of these points is discussed in turn below.11.1.5.1 Enhanced RiskHigh and volatile commodities prices magnify price and credit risk, necessitatingeven greater due diligence and more “bullet-proof” risk management. Moreover,because a customer may enter into a contract to purchase materials at one price ona given day for delivery a month hence, and be able to purchase the materials at amuch lower price later in the month, there is a real risk that the customer will not takedelivery under the original contract. Given the increased risk of non-performance,a reputation for reliability is even more important than previously, and firms arereluctant to transact with counterparties with which they have limited experience.Moreover, large counterparties that require regular supplies of a given commodityare less apt to reneg on a deal than smaller counterparties, and pose a lower creditrisk. Hence, smaller counterparties are at a significant competitive disadvantage inthese environs.11.1.5.2 Increased Need for FinancingBecause commodities prices are considerably higher than they have historicallybeen, traders need more money to finance a given transaction, and because pricesare more volatile, they must also earn a higher return to compensate them for theincreased risk. There is also the potential for very large margin calls on hedgingtransactions, which banks will not finance. Hence, trading firms must have sufficientcash available to meet potential margin calls.11.1.5.3 Diminished Range of Viable Trading StrategiesCertain trading strategies are not feasible in the current trading environment. Aspreviously noted, because suppliers do not need pre-financing, it is much more difficultto negotiate long-term offtake arrangements. As a result, trading firms areincreasingly acquiring ownership interests in mines and smelters as an alternativemeans of securing reliable sources of supply. Traders are also much more reluctantto take positions of any length, and to carry inventories (particularly in the copper