MAC: Mines and Communities

Jamaica's bauxite meltdown - Cae la bauxita en Jamaica

Published by MAC on 2009-02-10

One of the world's biggest bauxite and alumininum producing states is in deep trouble.

It's a crisis immediately reflected in shutdowns and loss of jobs, but prefigured by an astonishing history of corruption, mis-management, and lack of political and fiscal transparency.

Reflecting on the past fifteen years of what he calls "the loss of our birthright" through reckless privatisation, a former government mininster concludes:: "Government's should always avoid owning commercial enterprises unless there are clear and demonstrable national strategic advantages in doing so."

A lost birthright: The haemorraghing of the bauxite sector

Claude Clarke, Contributor

The Jamaica Gleaner

1st February 2009

The present contraction and threatened closure of Jamaica's bauxite/alumina industry resulting from the global economic crisis takes me back to an evening almost 15 years ago and a small dinner party I had arranged while I was chairman of JAMPRO. Among those present were the stewards of Government's bauxite/alumina interests, the heads of Government's development banks and an executive of a top Wall Street investment bank.

My purpose was to try to determine whether Government would be prepared to convert its holdings in the alumina sector to equity in a highway connecting Kingston and Montego Bay, with the potential for a dam across the Bog Walk gorge to provide water and electricity.

This was purely exploratory and was by no means a new idea, as I had picked it up from engineering types who had been discussing it for years. My clear impression at the end of the evening was that based on the strategic value accorded to Government's ownership of these alumina assets, the possibility of this transfer of equity was next to nil.

I felt at the time that a significant government-equity stake in the project would be essential to its financial feasibility. Based on information gleaned from engineering and financial experts, I had roughly calculated that the project would cost approximately US$800 million and that the only basis on which it would have been affordable for the Jamaican economy was if annual financing expenses could be held to a minimum.

This would be possible only if bilateral and/or multilateral debt at three to five per cent was used and Government put in equity of around US$400 million. This could only have come from the sale of a major government-owned asset, such as Clarendon Alumina Production (CAP), which I had estimated at the time to be worth around US$500 million.

Burden on the public purse

The approximately US$100 million of earnings after non-finance expenses, which a privately financed highway project would need to provide an adequate return to private debt and equity, could not have been generated by an affordable toll. The project would then become an unbearable burden on the public purse.

Over ten years later, in 2006, I found myself chairman of one of Government's bauxite/alumina entities. From this position, it came as a major shock when I found that CAP's value was no longer the approximately US$500 million I had earlier, correctly, estimated it to be, but was now less than US$50 million. This was a mind-numbing discovery.

Government's 50 per cent equity in Jamalco through CAP, which gave it decision-making power in the company and entitled it to 625,000 tonnes of alumina per year, had a market value of approximately US$550 million. In addition, between 1990 and 2007, the Government, through CAP invested a further US$440 million in Jamalco with a combination of direct cash payments and bauxite levy foregone. Government had therefore suffered a loss of almost US$1 billion on the capital value it had invested in CAP. How did this happen?

What is known is that sometime in 2000, CAP took on debt of US$125 million, among other things, to provide budget support to the Government. It also incurred a debt of US$65 million to help finance preliminary work on a planned expansion at Jamalco, from which it later withdrew.

CAP also incurred additional debt to invest a further $140 million in mud storage and mine infrastructure expansion at Jamalco. To the extent this investment was needed to replace depleted mud-storage capacity and new mining infrastructure for ongoing operations, it is surprising that special provisions had not been made over the years to prepare for this predictable expenditure; and loan financing should not have been necessary. However, if these new facilities were required to accommodate the planned expansion at Jamalco, in which CAP had decided not to participate and from which it would derive no commercial benefit, CAP should not have been required to contribute.

Having an equal voice

As it happens, the expansion project has since been aborted, because the low-cost Trinidadian liquid natural gas on which it had been predicated could not be secured. What is remarkable is that after all these investments were made by CAP, its equity in Jamalco was diluted from the strategically valuable 50 per cent, to a relatively weak 44 per cent. This removed the Government's raison d'être for participation in the company, that of having an equal voice in decisions affecting its future; and the strategic value which had hitherto made the idea of selling its interest to finance important infrastructure projects so unthinkable, was lost.

Two 10-year contracts covering the period 2000-2012, and involving almost the entire quantity of alumina controlled by the Government through its investment in the sector, should have provided very significant earnings for the country. However, as the prime minister recently disclosed, instead of earnings, massive losses have been experienced as a result of an unfortunate arrangement to fix the price on approximately 55 per cent of the contracts without an accompanying hedge against production-cost increases. These losses have been exacerbated by the manner in which the remaining 45 per cent of the contracted volumes, appropriately pegged to the London Metal Exchange price, were handled.

Long pricing positions

When the former administration was in office, it unwisely took long pricing positions on the futures market when distant prices were lower than nearby prices. As a result, price-hedging arrangements which were unfavourable to the country were made. This resulted in revenues being almost US$100 million less than might have been earned between 2002-2008. But what is even more unfortunate is that since this administration assumed office and at the same time that it was being justifiably critical of the last government's handling of our alumina sales, it is set to lose a further US$130 million on prices it may be forced to accept for alumina deliveries in 2009 and 2010.

Coinciding with the start of the new administration, there was a reversal in the pattern of prices in the futures market and distant prices were now higher than nearby prices. In addition, prices were rising in US dollars because of a temporary decline in the value of the dollar against other major currencies.

Aluminium prices rose above US$3,500 per tonne for both 2009 and 2010. This situation called for long price-hedging arrangements; but the Government apparently fell asleep and allowed these favourable pricing opportunities to pass. There was a long period of strong prices, peaking in July 2008 and stretching from the first quarter of that year to the end of August, just before the collapse of Lehman Brothers. Lehman's demise is widely seen as the event which precipitated the international financial crisis.

At a stretch, one could have forgiven delaying price-hedging decisions up to the point of Lehman's failure. But immediately thereafter, the Government should have moved quickly to hedge prices for at least the years 2009 and 2010, the period which most experts think the global economic crisis might last. Why this was not done, I do not know. What I do know is that because of this failure to act, we will be forced to deliver alumina for those two years based on metal prices as low as US$3,000 instead of over US$3,000. This converts to alumina prices some US$200 per tonne below that which would have been possible, were the Government more alert to its opportunities. The cumulative loss could be as much as US$130 million for the two-year period.

Trading losses

The losses to the country through the management of our alumina assets cannot be justified on any count and the Government's ownership position in the sector should have been discontinued a long time ago. The truth is, regardless of who owns the alumina plants, substantial benefits accrue to the country through the value of the local production-cost inputs, including the bauxite levy, workers' compensation and locally contracted services. This amounts to approximately US$90 to US$100 per tonne, or US$360 to US$400 million per year. However, for the past several years, our 'strategic' ownership position in alumina plants has caused us to give up a substantial portion of these earnings through trading losses and interest on debt incurred, essentially by CAP.

What is most amazing though, is that an asset as valuable as the approximately 725,000 metric tons of alumina owned by the Government with an annual potential revenue of US$250 million (J$21 billion) at 2008 average prices, could have been handled in the cavalier manner that it has, with no transparency whatsoever.

The prime minister has now expressed an interest in selling CAP, but because of prolonged losses, the company is now likely to have a substantial net negative value. And, selling it could result in the Government being left with a net liability of as much as US$250 million, as it would be forced to assume all of CAP's debt. Nonetheless, Government needs to end the haemorrhage of ongoing trading losses, although the timing of the sale of the company could not be worse, with the industry's asset prices now on the floor.

Sale was long over due

This decision to sell CAP should have come a whole lot sooner and the proceeds used to finance valuable infrastructure projects to spur economic development. However, the most important lesson which the Government should take from this sad experience is that governments should always avoid owning commercial enterprises unless there are clear and demonstrable national strategic advantages in doing so. And in those cases where ownership is justified, it should always be with full transparency, and management which is conducted strictly along commercial lines. Government should also have the wisdom and the discipline to let go of these assets as soon as the strategic reason for their ownership has passed. If these principles had been observed, this birthright of ours might not have been lost, and at so great a cost.

Claude Clarke is a former minister in the People's National Party government and manufacturer.

Jamaica's largest bauxite company cuts production


14th January 2009

KINGSTON - Jamaica's largest bauxite and alumina producing company, Alumina Partners of Jamaica, will cut production by 50 percent and lay off staff, a company official said here late Wednesday.

Officials at the company known as Alpart blamed the global economic slowdown for the cutbacks, which take effect on Thursday. "The economic situation required Alpart to take immediate action," said the Managing Director Alberto Fabrini.

"Alpart has already introduced measures to reduce cost and increase efficiency. We have been in dialogue with the workers and their unions about the measures," he said in a statement.

The company, which has the capacity to produce 1.65 million tonnes of alumina each year, did not say how long the production cut will last.

Fabrini said 250 part-time or temporary workers would lose their jobs on a phased basis.

"The workers are not in agreement with this move, but they understand that the global crisis has impacted on this situation," said Vincent Morrison, president of the National Workers Union, which represents some of the workers.

Representatives from United Company RUSAL, the majority shareholder in the company, have arrived in Jamaica to meet with government and company officials and said they could not rule out further job and production cuts.

Norwegian aluminum group Norsk Hydro (NHY.OL) also owns a stake in Alpart.

Although other bauxite companies operating in Jamaica have not said they will cut production and staff, analysts believe that could occur soon.

(Reporting by Horace Helps; Editing by Jane Sutton)

JLP seeks answers on Bauxite deal


2nd February 2009

Clive Mullings. The Jamaica Labour Party (JLP) is talking tough to the former administration as it seeks answers about a Bauxite deal it says is now costing the government millions of dollars.

The JLP said that is not the only thing it needs explained by the People's National Party, it also wants the party to come clean about allegations of squatting involving a Member of Parliament.

Thorn in the flesh

At the JLP's Emergency Press conference held on Monday Minister of Mining and Energy Clive Mullings outlined the details of an over $180 million loan agreement with Glencore for expansion work in the bauxite sector.

He said the loan agreement brokered under former finance minister, Omar Davies made no allowance for the consideration of inflation in the paying back of this loan.

Mr. Mullings said this debt has been inherited by his administration and is now a thorn in their flesh.

"We have challenges because we have to find JA$1.5 billion per month for this untenable situation but we can't just turn around and say we are not servicing the debt because you went into the international financial markets and secured a $200 million loan and therefore if we were to renege on those debts it would have consequences for us in the financial market and so we are saddled. We have around our necks not just an albatross but a concrete block," said Mr. Mullings.

The JLP is now asking the former Finance minister to come forward and reveal how the deal was brokered and why consideration was not given as to how the loan will be serviced.

Calls for Ian Hayles to be suspended

In the meanwhile, they are calling on opposition leader, Portia Simpson Miller to come forward and speak on allegations that Opposition spokesman on Investment and Development, Ian Hayles was involving in squatting in a section of Little Bay in Westmoreland.

Government Senator Warren Newby said an investigation should be done and the opposition leader should suspend Mr. Hayles from his position as opposition spokesperson until investigations are complete.

He said they will also be taking the issue to Prime Minister Bruce Golding.

"We further call on our Prime Minister who has responsibilities for land and development to order a full investigation into the matter as it surrounds those lands in Little Bay. We are concerned," said Senator Newby.

Jamaica bauxite gets another blow

4th February 2009

KINGSTON, Jamaica - Jamaica's bauxite industry has been dealt another blow, with the West Indies Alumina Company (WINDALCO) announcing that it will suspend operations at its two refineries in the island by the end of next month.

The move will see 250 more temporary workers going on the breadline, although the approximately 850 permanent workers will be retained during the plants' temporary closure.

"Preparations for suspension will start immediately," said WINDALCO's Managing Director Andrew Currie. "This decision is in response to the drastic reduction in demand for alumina as a consequence of the global downturn and continued unfavourable aluminium market conditions."

But the island's Mining and Telecommunications Minister Derrick Smith has not given up hope. He said the government is in negotiations to delay the temporary closure.

WINDALCO is owned by the world's largest aluminium producer, United Company RUSAL, which last December announced a 35 per cent cut in production and sent home 150 temporary workers in Jamaica.

The latest job cuts come less than a month after the country's largest bauxite producing company, Alumina Partners of Jamaica (Alpart), announced a cut in production and the laying off of 250 workers over a six-month period.

Alpart's Managing Director Alberto Fabrini blamed the cuts on the global economic crisis which has caused a drop in the demand for and price of aluminium.

Blow to Bauxite

INGRID BROWN, Observer senior reporter

Jamaica Observer

3rd February 2009

West Indies Alumina Company (Windalco) yesterday said it would temporarily close operations at its Kirkvine and Ewarton refineries on March 31, putting more than 250 part-time workers out of a job and leaving the fate of 850 permanent staff hanging in the balance.

The announcement, which took workers and their union by surprise, came three days after aluminium recorded a slight increase over its lowest price in over six years on the London Metal Exchange.

Wire services reported at the close of trading on Friday that the three-months aluminium price was indicated at US$1,338/48 a tonne, up from US$1,316.50 a week before.
The Observer front page reporting the birth of WINDALCO in June 2001.

Yesterday, WINDALCO, though not giving a date for resumption, said it would keep 850 permanent staff on its payroll and, over the next two months, cut 250 part-time and contract workers.

Just last week, Prime Minister Bruce Golding said the country should be prepared for setbacks in the bauxite sector, with the possibility of a complete shutdown of one or more alumina plants.

Golding told Parliament that his administration was working hard to avoid any shutdown and to keep the bauxite/alumina sector operating.

WINDALCO started operations in Jamaica on June 7, 2001 when Glencore took control of the Alcan Alumina operations and renamed it. The operation is managed by Russian firm UC RUSAL under a joint venture with Jamaica Bauxite Mining Ltd.

In a statement issued late yesterday afternoon, hours after Mining and Telecommunications Minister Derrick Smith announced the imminent closure in a press release, WINDALCO said preparations for suspension will start immediately.

Managing Director Andrew Currie said that "given the declining global demand for alumina and WINDALCO's position as a high cost producer, we are forced to temporarily suspend our production. This is the only economically appropriate measure".

The release stated further that the company will enter into consultations with its employees and unions to discuss the impact and the changes that will result from this decision.

However, yesterday, the National Workers Union, which represents more than 700 workers at the bauxite company, said it was first informed of the decision when the Observer contacted union head Vincent Morrison yesterday afternoon.

"I spoke with Andrew Currie at approximately 2:30 today and he never told me of any such thing and so this is the first we are hearing of a temporary closure by the end of March," Morrison said.

He said he would be seeking a meeting with the management at the earliest possible time to find out why the union was not informed of the company's decision before it became public knowledge.

When the Observer first contacted WINDALCO after 4:00 pm yesterday, Kayon Wallace, senior communications officer, said the company only got a decision from their owner earlier in the day and were in the process of informing the workers.

Meanwhile, Smith said the Government is currently negotiating with UC RUSAL to obtain an extension to ensure that the appropriate procedures for notification of closure are adhered to as stipulated under the joint venture agreement.

Smith described UC RUSAL's intention as not surprising in the context of the state of the bauxite alumina industry globally.

He said he wanted to assure bauxite/alumina workers and their trade unions that the Government is doing everything possible to delay plans for the temporary closure of UC RUSAL's operations and is exploring all options which will keep the plant open.

Efforts to speak directly to Smith proved futile as two messages left on his cellphone were never returned and permanent secretary in the ministry, Marcia Forbes, said he was the best person to comment on the matter.

The WINDALCO release said the decision was in response to the drastic reduction in demand for alumina as a consequence of the global downturn and continued unfavourable aluminium market conditions.

Jamaica explores sale of bauxite firm stake


28th January 2009

KINGSTON (Reuters) - Jamaica is exploring the sale of its minority share in one of the Caribbean island's bauxite and alumina producers, Prime Minister Bruce Golding said.

Golding told parliament late Tuesday the government was holding talks with potential purchasers of its 45 percent stake in the Jamalco refinery in the south-central parish of Clarendon.

"If suitable offers are put on the table that did not undervalue the assets of the company, we would be interested," Golding said. He did not disclose a possible asking price.

Aluminum giant Alcoa Inc (AA.N) holds 55 percent of the company, which has a production capacity of 1.4 million tonnes of alumina.

The two parties ran the company under a 50-50 share split until the middle of last year when the government gave Alcoa a further 5 percent stake as payback for the company's US$120 million investment to expand the plant's production by 150,000 tonnes.

"We are continuing our discussions with a number of interests but these discussions are at this point exploratory," Golding said.

Jamaica has suffered as a result of plunging prices for aluminum on the world market. Jamaican producers have slashed production and sent workers home because of the downturn.

"The situation is not getting any better and we are going through the worst slump in the bauxite and alumina industry that has ever been seen," Golding said.

The island's largest alumina producer, Alumina Partners of Jamaica, cut production at its 1.65-million tonne facility on the southwest coast by 50 percent and has laid off more than 250 workers.

(Reporting by Horace Helps, editing by Jim Loney)

Cesantean 250 trabajadores de la bauxita en Jamaica

Kingston, 15 ene 2009 (PL) La empresa Aluminium Partners of Jamaica (Alpart) anunció el despido de otros 250 de sus empleados, lo que eleva a 400 la cifra de empleos eliminados por esas firma en los dos últimos meses.

Las censatías alcanzaron a trabajadores no permanentes y sin calificación y un portavoz de Alpart dejó entrever que otros podrían seguir de mantenerse la recesión que tiene deprimidos los precios y la demanda del producto.

Un balance de las necesidades de fuerza de trabajo será anunciado en una fecha posterior, dijo la empresa en un comunicado después de una reunión de ejecutivos con Derrick Smith, ministro de Minería y Telecomunicaciones.

Asimismo Alpart anunció una reducción de hasta el 50 por ciento de su producción a partir de hoy debido a la disminución de la demanda en Europa, China y Estados Unidos, junto a la industria de la construcción y la de envases.

Esos países e industrias son los que más alcanzados por la crisis económica y financiera generada en Estados Unidos por la especulación en los mercados de futuro y en el de las hipotecas basura.

Los precios del aluminio en el mercado mundial bajaron de tres mil 200 dólares la toneladas a principios del año pasado a mil 900 en la actualidad.

En diciembre pasado el primer ministro Bruce Golding pidió a los representantes de la industria que hicieran "un esfuerzo supremo" por evitar las cesantías y dijo que adoptaría medidas para apoyarlas en estos tiempos de crisis.

Entendidos en el tema auguran que la ola de despidos está lejos de haber terminado y que otros productores harán recortes sustanciales en sus nóminas, en especial de mano de obra no calificada.

Busca Jamaica compradores para su participación en industria

Kingston, 29 ene 2009 (PL) El gobierno jamaicano indicó a través de su primer ministro, Bruce Golding, que está a la búsqueda de postores para el 45 por ciento de las acciones que posee en la refinería de bauxita Jamalco.

Golding informó al parlamento que están en curso conversaciones con potenciales compradores de su participación, desorden del 45 por ciento, en la industria, principal del país.

Los precios del metal han sufrido una sustantiva baja en el mercado mundial y otras empresas, entre ellas la poderosa RUSAL, han despedido varios cientos de obreros no calificados y empleados administrativos.

Golding condicionó el cierre de la operación a que las ofertas no sean inferiores al valor real de los bienes de la compañía, cuyo accionista mayoritario es la estadounidense ALCOA.

La firma y el gobierno jamaicano tenían participaciones iguales, pero en 2008 el segundo cedió un 5 por ciento de sus bonos como pago de su parte en una inversión de 120 millones de dólares para ampliar la capacidad de producción a 150 mil toneladas al año.

En la actualidad Jamalco tiene una capacidad de producción de un millón 400 mil toneladas.

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