By Silvia Antonioli and Jacqueline Cowhig
LUGANO, Switzerland (Reuters) - The climate is not quite so balmy nowadays in Lugano, the Swiss idyll that discreetly stages the drama of international coal and steel trading with a colorful cast of Italian and Russian tycoons.
The talk of the town is the demise of trader Carbofer, from trading billions of dollars of steel and coal in 2008 to a shutdown of trading after failing to secure much-needed cash injection.
Dealing in steel and coal has become a risky business in the last few months at the centre of a highly specialized trading ecosystem that links Italian industry with Russia raw materials and moves coal around the world to feed steel mills.
Markets are too volatile, less profitable and much riskier and the cost of credit is escalating, especially for the niche players around the Lugano lakeside, much less heavyweight than the big commodities traders across the Swiss cantons in Geneva and Zug.
"We have to cut costs like everybody else because this is a difficult trading environment, credit is a challenge and costs have been rising," said Alberto Ravano, President of Bulk Trading SA, active in the coal market.
A trader excuses himself for being late for a meeting: his company's board meeting, usually a two or three hour affair, went on until evening. The company has decided to trim down its structure, he says. Jobs will go in Lugano and elsewhere.
The shadow of Carbofer falls long over the red roofs of the city which likes to say it adds Italian allure to Swiss efficiency.
Carbofer has fired many of its employees and agreed to move its steel trading team to Starglobe, also in Lugano. The coal traders have left to set up a company with a Monte Carlo-based conglomerate, effectively leaving it deprived of any trader.
Its creditors are now moving to recover hefty debts threatening the once-major spot market player with liquidation.
"Swiss banks are more supportive than European banks but even so, compared with a few years ago they are more restrictive," a trader said. "The biggest risk is that we could see some of the smaller-medium traders go bust if the banks withdraw their support."
Banks started to cut their exposure to commodity trading a few months ago and have yet to reopen the money tap.
"As usual banks open the umbrella when it has just stopped raining," said Gianfranco Imperato, head of coal and steel trading house Trasteel.
That is not in keeping with Lugano's business friendly reputation.
"We have really flexible rules and laws here - it takes just a couple of weeks to set up a company here," said Marco Passalia of the chamber of commerce of the Italian-speaking Ticino Canton and secretary of the Lugano Commodity Trading Association.
"Russians started coming here in the 1970s and this relationship developed and gave the opportunity for other entrepreneurs to come here," he added. "It's a hub of know-how in the sector now."
BRUNO BOLFO AND THE RUSSIANS
Lugano was not always known for its commodities trading.
"Lugano is a peculiar case," said Imperato. "It's a sort of weird fauna - when I arrived in the 90s people in Lugano thought we were strange beasts. There were only banks or trust companies before. Now everyone knows that there is this trading world gravitating here - we have shaken Lugano a bit."
A favorable tax regime and access to discreet banks with good expertise on commodity trade financing lured the first traders to the lakeside. The turning point came with the arrival of Bruno Bolfo, the charismatic Genoese entrepreneur who founded Duferco in 1979.
"Up there is Olympus!" said a trader pointing at the top floor of Duferco's austere concrete and glass building looming over the city's elegant boutiques.
From his eyrie the 71-year old Duferco president and chairman of the board controls one of world's largest private steel trading houses with more than 8,000 employees worldwide.
Bolfo, with a reputation for charm and business intuition, was the New York-based export director of Italian state-owned steelmaker Italsider, before setting up on his own.
He was one of the first to capitalize on the switch of steel production to emerging countries in the 1970s and to focus activity in South America before shifting attention to Eastern Europe in the late 80s, when he moved to Lugano.
The company grew dramatically thanks to takeovers of industrial assets, strategic joint ventures and marketing agreements with some of the major Russian and Ukrainian steel mills, including Russia's largest steelmaker Evraz, Novolipetsk Steel (NLMK) and Ukrainian Industrial Union of Donbass (ISD).
Its growth fed the Lugano network and drew a skilled and specialized group of people to Canton Ticino.
"I think Duferco opened the way when it came here more than 20 years ago," said Bolfo's nephew Massimo Bolfo, who after serving as a CEO at Duferco started his own company, Trasteel, in Lugano, in 2009.
Many former Duferco employees moved on to found, manage or work for new, competing steel and steel raw materials trading companies in Lugano, including Carbofer, Trasteel and Starglobe, most only a short walk from one another.
"While for steel the key was Duferco, which was a sort of mother whose children have spread into the Lugano territory, the coal situation is a bit different," said former Duferco trader Imperato.
Lugano lured trading clans from Genoa, an Italian trading hub since the Crusades, who are powerful in the coal trade, he said.
A more attractive banking climate just two hours drive from their family homes was decisive.
"The problem of doing trading in Italy is that you don't have the right banks; there is no trade financing culture in Italy," Imperato said.
Add one more ingredient to the potent mercantile mix - Russia.
"There are many affinities between Russians and Italians: we have got the same value of family, the same concept of politics and the same concept of mafia," joked an Italian trader, who lives in Lugano with his Russian partner who he met while doing business in St. Petersburg.
Russian is commonly heard in the city and Russian restaurants, language schools and Russian-dedicated areas in department stores have grown.
In business the dynamic can be traced back to Sytco, the Lugano pioneer of Milanese Silvano Todaro who set up there in 1962.
"After perestroika the Russians were trying to strengthen ties with the outside world," Todaro told Reuters at his company headquarters. The building, adorned with fine artwork, also serves as the San Marino consulate for the canton.
"That is when we started a number of joint-ventures with the them and they started to come here to Lugano," he added. "Some of these companies disappeared, some moved, some stayed, thrived and grew."
"This spread the name of Lugano to all the Russians in the steel business."
When Bruno Bolfo arrived in Lugano he followed the "Todaro model", agreeing partnerships with Russian and Ukrainian steel makers.
"Bolfo got into the Russian business at the right moment, when, after the collapse of the Soviet Union there were immense vacuums," a former Duferco employee said.
Russian entrepreneurs have continued to migrate to Lugano.
Among the firms owned or part-owned by Russian interests are: Zarechnya, a coal producer; Novex, an NLMK subsidiary; Starglobe, a trading house owned by Sergey Rashnikov, brother of MMK controlling shareholder Viktor Rashnikov and the troubled Carbofer controlled by former Evraz co-owner, Russian entrepreneur Alexander Katunin.
"I believe that Russians that come to Ticino have many more affinities with the Italians rather than with the French or the German," said Starglobe's Bozinovski, whose office building also houses the Russian language school in Ticino.
"Bigger companies who have a much larger turnover may prefer to go elsewhere to take advantage of lower taxation while many other companies prefer to come to Lugano, especially if the management of the company decides to live here with their families."
Now the empire-building is over and the talk is of survival, Lugano veterans say. The lush slopes of the Ticino have not been a shield from the rising cost of credit, increased of counterparty risk and shrinking margins.
Companies are responding in different ways but all of them are trying to reduce risk-taking, which, many think, was one of the main causes for Carbofer's implosion.
"The market has changed. It is much riskier, especially for small players," a young Italian trader said.
"But we will survive. Lugano would be nothing without us," he said as he disappeared on an Italian scooter to meet his Russian girlfriend.
(Additional reporting by Emma Farge in Geneva; Editing by William Hardy)