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Rusal, Jamaica stand-off

Published:Friday | March 25, 2011 | 3:00 AM
The Windalco Kirkvine bauxite plant in Manchester is seen in this September 15, 2004 aerial photograph. - File
The Windalco Kirkvine bauxite plant in Manchester is seen in this September 15, 2004 aerial photograph. - File
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Russians want concessions to reopen Kirkvine

UC Rusal, the owners of the Windalco alumina refineries here, is insisting on financial concessions for reopening its Kirkvine facility that are, in most cases, more than twice as good as those it received for restarting its Ewarton works nearly a year ago - even though aluminium prices have risen sharply in recent months, foreign and local industry sources say.

The Jamaican Government, however, has offered the Russian firm the same terms as previously, leading to uncertainty over the planned mid-year restart of the 550,000-tonne capacity Kirkvine, the sources say.

Should the administration, in the end, acquiesce to UC Rusal's demand, it will leave a gaping hole in the Government's revenue budget over the next two years, making it more difficult for Jamaica to meet fiscal deficit targets demanded by its loan agreement with the International Monetary Fund (IMF).

Mining and Energy Minister James Robertson, who, two months ago, announced the imminent reopening of Kirkvine, was not immediately available for comment.

But an authoritative mining analyst in London told the Financial Gleaner: "UC Rusal is playing hard-ball with the Jamaican Government, and has threatened to walk away from a deal if they don't get what they have asked for.

"This includes not paying the country's bauxite alumina levy for two years, or alternative arrangements that would largely amount to same thing, or be even worse for the Jamaican Government."

UC Rusal, owned by Russian businessman Oleg Deripaska, controls approximately half of Jamaica's alumina production capacity.

Between Kirkvine and Ewarton, there is more than 1.1 million tonnes of production, in addition to which it is a 65 per cent partner, with Norway's Norsk Hydro, in the 1.6-million tonne Alpart finery.

Only the 1.425-million tonne Jamalco refinery, owned by Alcoa and the Jamaican Government, is outside Rusal's control.

In the middle of the global recession in 2009, UC Rusal began mothballing its Jamaican refineries - which fall in the mid-tier of global productivity - saying that they were too expensive to operate in the existing environment.

The impact has been devastating for the Government's budget.

For instance, in the 2007-08 fiscal year, the Government earned approximately J$5 billion from its bauxite production levy, the production tax Jamaica charges mining firms and refiners that is linked to the price of alumina and aluminium on the London Metal Exchange (LME).

In 2008-09, the projected earnings from this tax would reach more than J$8.6 billion, but Jamaica received just only half of that amount as bauxite and alumina production declined and prices fell.

Indeed, for the first 10 months of the closing fiscal year, up to January, the Government earned only J$255 million from the tax, less than half its projection.

Last June, when UC Rusal reopened the Ewarton refinery in the parish of St Catherine and employment several hundred persons, it was assumed that the Government had granted it concessions, but the specific details were not announced.

It has now emerged that in exchange for the jobs and economic activity generated by Ewarton's reopening last June, the Government offered a full waiver of the levy - normally at US$5 per tonne of bauxite or bauxite equivalent - for the first year.

Thereafter, Ewarton would pay at US$2.50 a tonne if the average price for aluminium on the LME stayed below US$2,100 per tonne. If the price of aluminium moved above US$2,100, the levy would jump 20 per cent to US$3 a tonne.

From an average price close to US$1,650 a tonne in 2009, aluminium jumped, on average, to around US$2,050 last year. It is now close to US$2,600, running - as was the case of last year - ahead of projection.

But according to the Financial Gleaner sources, in February Rusal, through its Jamaica country manager, Igor Dorofeev, in negotiating the reopening of Kirkvine proposed a two-year relief of the bauxite levy, as well as the cancellation of the environmental levy on imports.

Later, Dorofeev, proposed a production levy of US$1 per tonne, or 40 per cent of what is paid by Ewarton, if aluminium price on the LME stayed at, or below US$2,100 per tonne.

The price would then move by US$0.50 (fifty cents) for each US$100 rise above the benchmark price.

Doropfeev argued that the US bosses felt that this arrangement would be fair, given the company's investment to restart its Jamaica operations and costs it had endure because of the poor performance of some of its mining contractors.

'"Quietly, too, Rusal has been saying Government has it over barrel and has to make concessions if they want Kirkvine reopened," said one London source. "They have also talked about marrying Kirkvine with other business possibilities in that Caribbean island."

However, our sources say, Jamaican officials have made the point that Rusal has problems at the facilities in Guinea and has relational issues in Guyana.

"The problem Jamaica faces is that the Government wants to deal with its unemployment problem and the specific detail of Kirkvine may be overcome by the bigger picture of the country's agreement with the IMF," explained one analyst.

business@gleanerjm.com