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Stabroek News



Unsettled time for bauxite/alumina
published: Sunday | May 25, 2008

Dr Carlton E. Davis, Contributor


Davis

A new minister is set to take responsibility for the subject of mining soon and to a very significant extent, this is largely about the bauxite and alumina sector. He will not be kept idle in this area as the sector remains one of the fundamental pillars of the Jamaican economy; and it currently faces a number of serious challenges.

In respect of its role in the Jamaican economy:

It is by far and away the biggest gross-merchandise earner, which last calendar year stood at about US$1.3 billion (more than double its 'runner-up' petroleum products sold to ships and aircraft).

major foreign-exchange earner

A recent article, for instance, on the trade in goods between Canada and Jamaica revealed that of US$308 million worth of goods exported by us in 2006, alumina accounted for US$287 million.

It stands behind only remittances (1) and tourism (2) as a major foreign-exchange earner for the country.

Although not a large employer of labour (just about 4,000), the average income earned per worker is much greater than that for all but a handful of entities.

Although nowhere near the 'high-flying' earlier years subsequent to the introduction of a bauxite-production levy in 1974, it still remains a significant contributor to Government's revenues. For example, in calendar year 2007, levy and corporate income tax amounted to US$100 million; and the Government has budgeted some J$8.5 billion receipts for the 2008-09 fiscal budget. These considerations make it imperative that the industry survives.

It currently faces a number of issues, which will have to be managed very well to ensure its long-term viability. I propose to look at three of these in this article. These are: changing ownership; the increase in the price of oil; and, bauxite quality.

aluminium 'majors'

For most of the 56 years of the industry's existence in Jamaica, it was part of the network of pedigreed and (vertically) integrated specialist aluminium players. For a long time, we had four of the six aluminium 'majors' operating in the island: Alcoa, (which was one of the founders of the industry going back to 1888); Alcan, (a creation of Alcoa, which eventually became a fully independent company following Unites States court action); and Kaiser and Reynolds, (both of which emerged post-World War II by the determination of the US government to counteract Alcoa's monopoly in the industry).

These four companies, (plus Pechiney of France and Alusuisse of Switzerland) bestrode the international aluminium world like a colossus to form the 'Six Sisters' (borrowing from the term applied to the powerful seven companies then operating in the international petroleum industry) of the alumina industry.

In this relatively settled environment, both government and management knew with whom they were dealing and as the cliché goes, they could "put faces to names". The 'metropoles' for the local operations were respectively: Montreal, Canada (Alcan); Pittsburgh, Pennsylvania, USA, (Alcoa); Richmond, Virginia, USA, (Reynolds) and, Oakland, California, USA, (Kaiser).

But much has changed in this Age of Turbulence (as Alan Greenspan entitled his recent book). there are now features such as (a) takeovers (b) mergers (c) in more recent times, an easier stance by governments in the developed world on market dominance by firms, and (d) the hitherto easy availability of money to facilitate takeovers or mergers. These developments have been resulting in frequent ownership changes in the worldwide industry and in particular, the Jamaican operations.

four of the local operations

A look at four of the local operations which have experienced ownership changes will illustrate the point.

First, the Kirkvine and Ewarton operations: These were wholly owned by Alcan from 1952 (Kirkvine) and 1959 (Ewarton), respectively, until 1978, when the Government took a small seven per cent stake. This continued until 2001, when Alcan sold its interest to Glencore International AG, which (with its predecessor Marc Rich) had been involved in Jamaica as a trader in alumina since the late 1970s.

But this ownership by Glencore was to be short-lived, as in 2007, it merged its alumina and aluminium assets with those of the giant Russian aluminium company RUSAL, and a smaller Russian aluminium company, SUAL, to form UC RUSAL (comprising RUSAL, 68 per cent; SUAL, 20 per cent and Glencore, 12 per cent; and UC RUSAL in turn became the 93 per cent owner of these operations.

In consequence, the metropole for the Ewarton and Kirkvine operations has moved from Montreal, Canada (1952-2001), to Zug, Switzerland (2001-2007), and now, since 2007, to Moscow, Russia.

Second, Alpart started out as a partnership between the two major bauxite producers in the island, Kaiser (36.5 per cent) and Reynolds (36.5 per cent), with a copper (and aluminium) company, Anaconda, (27 per cent ) in 1969. the partnership of three held until Anaconda exited in the 1980s, leaving Kaiser and Reynolds as 50:50 owners. This arrangement held until 1988, when Reynolds dropped out and was partially replaced by Hydro Aluminium of Norway, with the partnership now being Kaiser, 65 per cent, and Hydro Aluminium, 35 per cent. Kaiser's troubles (which started when it was taken over by a Mr Clore, and he then lost it to a Mr Hurwitz) led to it selling its bauxite and alumina operations, including its share of Alpart.

In the bid for Alpart, Glencore International AG beat out a spirited RUSAL challenge for Kaiser's 65 per cent ownership and so, Alpart's ownership became GLENCORE, 65 per cent; Hydro Aluminium, 35 per cent. But, this too was to end soon, as like Windalco, UC RUSAL took over majority ownership in 2007 with the ownership position now being UC RUSAL, 65 per cent and Hydro Aluminium, 35 per cent.

shifting

So, for Alpart, the metropole has shifted from Oakland, California, and Richmond, Virginia, in the USA, to Houston, Texas, Gramercy, Louisiana in the USA, to Zug, Switzerland, to now Moscow, Russia, and Oslo, Norway.

The third entity which has seen ownership changes is the north coast bauxite operation. It was wholly owned by Kaiser between 1968 and 1980 when the Government bought 51 per cent of the equity. This 51 per cent was an asset purchase only. For all intents and purposes, it remained a Kaiser operation as that company paid for all the operating costs and took all the bauxite.

Kaiser's troubles led to the sale of its ownership share in 2004 to St Ann Bauxite Company, owned 50 per cent by the Xstrata-owned Noranda Aluminum and 50 per cent by Century Aluminum of the USA. It should be noted that Glencore has shares in both Xstrata (ca. 34 per cent) and Century Aluminum (ca. 30 per cent). In 2007, Xstrata sold Noranda to Leon Black's Apollo Management, a 'buyout' company based in New York. Apollo Management, it might be mentioned in passing, also owns Linen 'N Things, a home-furnishing chain across the USA, which is currently having financial problems.

So, for the north coast bauxite operations, the metropole has moved from Oakland, California, to Houston, Texas, to Gramercy, Louisiana, to Monterey, California (Century) and Zug, Switzerland, (Xstrata) and now Monterey, California, and Huntingdon, Tennessee (Noranda).

It is pertinent to point out that the major owner of RUSAL (and UC RUSAL), Mr Deripaska, has just purchased 25 per cent of the Arctic Norisk Nickel company for about US$13 billion; and it is understood that this purchase has 'distracted' him somewhat from addressing the issues of assets like those in Jamaica.

While changes, such as those described above, are not necessarily a bad thing and in fact can lead to good outcomes, the truth is they can be quite unsettling, especially when they are so frequent.


A section of the Alpart plant at Nain, St Elizabeth. - File

rise in PRICE OF OIL

The second major change which has to be managed is the rise in the price of oil.

I doubt very much that anyone in the industry or elsewhere, for that matter, anticipated the level of increases we have been experiencing. The Harvard economist and New York Times columnist, Paul Krugman, reminded us of what two recognised publications had to say on the future price of oil.

Krugman's first article (NYT, April 21) indicated that in late 1999, the distinguished journal, The Economist, stated that the price of oil, which was then at US$10 per barrel, might not last: "it could get to as low as US$5 per barrel." The other article by Paul Krugman (NYT, May 2) referred to an October 2004 article in the National Review, 'The Oil Bubble: Will it Burst?', which argued that oil prices then at US$50 per barrel would soon collapse.

But newspapers and journals, however distinguished in the field of economics, were not the only ones which got it wrong. No less an authority than OPEC pledged a few years ago that it would do its best to maintain prices somewhere between US$22 and US$28 per barrel. Its position was that if prices were moving below US$22 per barrel, it would cut production; if they were rising above US$28 per barrel, it would increase production.

While the country is somewhat more informed than before of the broad adverse impacts on the economy of the increases of oil prices, less is known about the specific adverse impacts on the bauxite and alumina sector.

SERIOUS PROBLEM

If we take the average price of producing a tonne of alumina at one of our more efficient plants in 2003 and 2008 (year-to-date) and multiply by our total annual production of about 4.2 million tonnes, the cost to the industry has moved from about US$150 million in 2003 to close to US$550 million (and rising) now. No more illustration is necessary to show that we have serious problems on our hands.

Dr Carlton Davis is a former executive director and chairman of the Jamaica Bauxite Institute.

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