The Global Economic and Financial Crisis and the Jamaican Bauxite - PDF document

The Global Economic and Financial Crisis and the Jamaican Bauxite and Alumina Industry Carlton E. Davis ILO Tripartite Caribbean Conference on the Theme: Promoting Human Prosperity beyond the Global Financial Crisis - Seeking Sustainable Solutions Through Social Dialogue Kingston, Jamaica, April 1 – 2, 2009

2 Introduction Ladies and Gentlemen: I am pleased to participate in this Conference staged by the International Labour Organisation. It is important that all key stakeholders have a better understanding of where we are and what is the way forward in respect of the major sectors of our economies. I have been asked to address the implications of the global economic and financial crisis on Jamaica’s bauxite and alumina sector. I propose to do so, in the allotted time, under four broad headings: • The contributions of the industry to the Jamaican Economy. • The challenges it faces. • The current situation. • The Way Forward. Each will be considered in turn. I. The Contributions of the Industry to the Jamaican Economy As most of you are aware, I am sure, the bauxite and alumina industry has been an important pillar of the Jamaican economy for many years.

3 I will illustrate my presentation with a number of tables. The first one shows the industry’s contribution to export earnings over the last thirty-four years (represented for convenience in ten-year periods except for the last one). As can be observed, this contribution has been more than one half of the total throughout and went as close to 70% in the first period. I should point out that the extent of the contribution is somewhat underestimated when one takes into account the fact that: (1) in the middle periods, the second largest export earner was garments under the so-called PL 807 programme, which whilst very important in terms of employment opportunities retained perhaps no more than 10% of the gross value of the exports; (2) in the more recent period, the sale of bunker and aviation fuels has emerged to be the second largest export earner; but not unlike the case of garments has a low retained value. The bauxite and alumina industry has a retained value of some 40% - 50% through the payment for taxes, levy, royalty and wages and salaries; and a miscellany of expenditures for capital projects and production. This level of retention has made the industry one of the three largest net earners of foreign exchange for the country. Currently, it stands behind

4 remittances (No. 1) and tourism and is quite some distance ahead of other foreign exchange earning sectors or activities. Although the sector is not a large employer of labour, at any rate compared to large employers such as the state, tourism and sugar sectors, its contribution in this area is nevertheless important. Among other things, the relatively small labour force earns more in net foreign exchange than the sugar and banana industries combined. Data in Tables 2, 3, and 4 show, respectively: (a) the employment level by activity; and (b) the Aggregate Wages and Salaries over 5-year periods since 1974; and (c) Year-by-Year 2004 to 2008. The number of people directly employed in the industry is one may say a ‘first approximation’ in respect of its impact on employment for the following reasons: (a) the ‘generic’ importance of adequate foreign exchange earned by the sector, for many economic activities such as construction, farming, etc. in the country; (b) the ‘outsourcing’ of some mining activities, hence people so employed (close to 400 at last count) are not reflected in the data cited earlier;

5 (c) the undertaking of various capital projects for plant expansions, mining, transportation, and waste disposal infrastructure, among other activities, results in the employment of hundreds of people from time to time - data in Table 4 indicate the extent of these capital investments between 2000 and 2007; (d) the impact on small business operations in the rural areas surrounding bauxite and alumina operations. In respect of Government revenues , although the industry, as a result of competitive factors, is no longer the major contributor that it once was (in the late 1970s it accounted for as much as 26% of Government revenues) it is still not insignificant, through corporate income tax, levy, royalty and personal income tax paid by the work force. These amounted, intoto to some US$125 million in 2007. In sum, there can be little argument that the bauxite and alumina industry has been an important contributor to the Jamaican economy in more ways than one. I turn next to the challenges which the industry faces. II. The Challenges the Industry Faces The aluminium industry of which the bauxite and alumina industry is an ‘upstream’ part, is, (as I have often noted) notoriously cyclical. It is

6 cyclical in terms of the demand for the products and the prices which they fetch. This cyclicality can be illustrated by the prices of aluminium on the London Metal Exchange (LME). The data in Table 6 show these prices for the years 1989 -2008 (and projected for 2009). Note very carefully the ups and downs over the years and in particular, the dramatic downturn in more recent times. If one takes the average price for 2008 and assume a value of 12½% of the price as the value for the alumina produced, the revenue to a producer would be US$322 per tonne. Now compare this with the current and projected situation for 2009 that same producer would be receiving something between $180 and $187.50 per tonne. In the circumstance, unless his costs were somehow to be reduced in short order, very significant which is nigh impossible given the number of more-or-less fixed costs which must be carried, he finds himself losing money. This is the situation in which the Jamaican industry finds itself. The volatility is also reflected in two of the important inputs in price, production of alumina, fuel and caustic soda.

7 The data in Table 7 illustrate. Volatility apart, the global economic and financial crisis has contributed to a reduction in demand for aluminium (and thus alumina). The data in Tables 8 and 9 illustrate the changing supply/demand and inventory situations, respectively. Last, but not least, one of the consequences of globalisation has been the ‘Buy-Out fever’ of entity by another, whether leveraged or otherwise. Tables 10, 11 and 12 show that the Jamaican industry has not escaped this particular feature of the current ‘wave’ of globalisation. This leads to uncertainties in terms of the local industry’s future in a number of important respects. III. The Current Situation Table 13 shows the current ownership structure of the industry. Of the four alumina plants, three will be closed by May 16; and the continued operation of the fourth, will depend on whether the Government of Jamaica can put a suitable arrangement in place. This means that over 70% of the greater value-added alumina operations will be closed for certain for the owners say, ‘tongue-in-cheek’ a period 12-18 months.

8 The workers at the Alpart refinery will be made redundant and the owners say that those at the two Windalco operations will be retained on a 3- day work week basis. For how long we do not know. The St. Ann Bauxite operations will be producing at some 60% of its capacity with a reduced workforce, and most of those still working on a 4- day work week basis. All told, the Jamaican industry is experiencing its biggest crisis in its history with a foreign exchange and revenue loss estimated to be in the order of some 60% or more compared to 2007/2008. What is to be done? IV. The Way Forward Although the industry is largely in private sector hands, the Government has and intends to be proactive to the extent possible in staging its recovery as the matter is too important to the national economy to leave to the private sector alone. A framework for future action would include, among other things: (a) energy; (b) producing an alternative alumina product; (c) modification of the current processing technology; (d) use of bauxite lands; and (e) diversification of the country’s economic base.

9 1. Energy Given the importance of energy in the overall competitiveness of the industry (and the economy as a whole) it has to be relentless in its pursuit of an alternative fuel to oil as a basis for securing medium to long-term supplies on a more predictable price basis. Latest reports suggest Venezuela and Colombia as potential regional sources of natural gas with the possibility of some amount being secured from private sector interests in Trinidad and Tobago. Not only is an alternative fuel required but the investments must be made to secure greater efficiency in its use. 2. Alternative Alumina Product A close look has to be given to the possibility of Jamaica producing specialty aluminas (rather than metal grade alumina) at one of its plants that may be hard put to produce metal grade alumina competitively. 3. Processing Technologies Work has to be done to ensure that the processing technologies are modified to enable the efficient processing of ores with different mineralogical features than those which have been

10 processed by three of the plants for most of these last fifty- seven years. 4. Use of Bauxite Lands The acceleration of the use of bauxite lands, (mined-out and unmined) for productive agriculture to meet general local demand, the tourism sector and the export of exotics. 5. Diversification of Economy A determination to diversify the country’s economic base to areas where there will be a demand (health professionals, for example).