Editorial | Bauxite industry review necessary

The plan, as announced by Robert Montague, the mining and transport minister, to merge, and divest via an IPO, of the Government's two remaining substantial stakes in Jamaica's bauxite-alumina sector is, on the face of it, a good idea.

There is, however, need for further and better particulars before we can arrive at a final verdict on the idea, which, in the current environment, highlights the need for something more: a deep analysis and debate on the future of bauxite-alumina in Jamaica. There is need for a strategic vision for the industry.

With regard to the idea floated in Parliament last week by Mr Montague, this newspaper begins with its broad philosophical position. That is, the business of government is not owning and operating businesses. Its core business, apart from doing those narrow things - such as providing law - that are best handled by the State - ought to be creating an enabling environment in which private enterprise can be successful. In any event, governments - and Jamaica's is no exception - usually make a hash of running commercial enterprises.

From that perspective, we have consistently encouraged Government to divest itself of commercial assets, thus freeing resources, including financial and human capital, for investment in its core operations. That is why instinctively we back the idea of merging the Jamaica Bauxite Mining Ltd (JBM) and Clarendon Alumina Partners (CAP) and selling them off.

We are also enthused by Mr Montague's intention for an IPO, as this approach to divestment, if properly handled, can allow the expansion of the share-ownership class. Further, as we have suggested in the past, divestment can be used to offset public wage demands without upending tight fiscal programmes, by offering workers shares in lieu of cash.

FINITE RESOURCE

With regard to the specific project, a number of issues command our attention, not least the fact that bauxite is a finite resource. Once we continue to extract it, Jamaica, at some point, will have no more in commercial quantity. Bauxite has ebbed and flowed as a globally strategic mineral.

Additionally, the Government, through JBM, owns 51 per cent of the mining assets of the former Noranda Bauxite Partners, whose 49 per cent stake has been acquired by another American outfit, New Day Aluminium. Further, CAP, unless things have changed, owns 45 per cent - the remainder is controlled by the Noble Group - of Jamalco's alumina refinery, in Hayes, Clarendon, which is managed by Alcoa.

CAP and JBM, in the face of the uptick in the price of aluminium, over the past two years, are presumed be profitable, but it is not clear whether Jamaica is getting substantial value from this expansion. Given the finite nature of bauxite as a resource and concerns about transfer pricing within transnational companies to strategically shift cost and profit centres, Jamaica, in the 1970s, placed a production levy on bauxite-alumina, which it has sometimes tweaked, but largely kept in place, earning the country over US$4 billion since its inception. However, the government has placed a five-year moratorium on the levy at a time when aluminium prices are strong.

The levy's suspension should, other things being equal, enhance the prospect of a successful IPO for the merged entities, but there remains the question of whether such a move, in the circumstances, is in the broader national interest. That, we believe, should be subject to deep analysis as part of creating a strategic vision for the industry. The review should also take into account the long-term prospects for Oleg Deripaska's UC Rusal - parent of the Windalco refinery in Ewarton, St Catherine, and which is being restructured to hopefully escape potentially crippling sanctions by the United States - as well as financial problems being faced by Noble and their implications for Jamaica.

It is unfortunate that the Jamaica Bauxite Institute, which we would expect to do such a review, has been allowed to become run down. But the job has to be done.