Growth & Jobs | Why the future of Alpart matters to you - Projected increased Alumina production is a near-term game changer, says Small-Ferguson

The Chief investment strategist and head of research at JN Fund Managers Limited, Ramon Small-Ferguson, is of the view that the impact on Jamaica's economy that could result from the reopening of the Alpart plant may be lost on many Jamaicans but indicated that the projected increase in activity surrounding the plant in the near term is a potential game changer. His optimism is predicated on the positive prospects for world aluminium demand.

A total of 1.86 million tonnes of alumina was produced in Jamaica in 2016, but with the reopening of Alpart, output is set to increase to more than two million tonnes by the end of 2018 and over three million tonnes over a longer horizon.

"While the substantial projected increase in Jamaica's alumina output is a tremendous positive for Jamaica in the near term, there are much bigger plans centred on Alpart," the chief investment strategist said.

"The intended construction of a 230-megawatt liquefied natural gas (LNG)-fired power plant, as well as the creation of an economic zone and industrial park that will produce aluminium-based products, will have a massive impact on revitalising and significantly enhancing the viability and sustainability of Jamaica's bauxite/alumina and potentially aluminium industries."

The sharp decline in the bauxite/alumina industry, resulting from the 2008-2009 financial crisis and the subsequent closure of the Alpart plant, has had many locals questioning the industry's continued relevance to the long-term growth prospects of Jamaica's economy.

Mike Henry, minister of transport and mining, told Parliament last April that during 2016, the gross value of the export of bauxite and alumina from Jamaica increased by 3.4 per cent to US$672.3 million.

Citing data from the Statistical Institute of Jamaica (STATIN), Small-Ferguson noted that in 2016, alumina exports amounted to nearly five times the value of bauxite exports, while pointing out that, "together, they represent the largest domestic export, and our third-largest source of foreign exchange".

In his parliamentary presentation, the minister of transport and mining stated that China's Jiuquan Iron and Steel Company Ltd (JISCO), which paid US$299 million to acquire Alpart, will invest a total of US$2 billion to modernise and expand its operations. The stated aim of JISCO is then to build an additional plant that would produce three million tonnes, bringing their combined output to five million tonnes.

"That is why the acquisition of Alpart by JISCO in 2017 is so important," the minister explained. "If their plans are fully implemented, they will more than double the country's domestic exports and massively expand foreign exchange income.

"Rising aluminium prices, the tremendous potential for improved efficiencies through modernisation, and well as the opportunities for expansion represented a clear value proposition for the acquisition of Alpart by JISCO, which is a major iron and steel producer in North-West China," Small-Ferguson stated.

Aluminium traded at well over US$3,000 per tonne in early 2008 before crashing to just above US$1,200 per tonne early in 2009, based on data from the London Metal Exchange (LME). The LME spot price was $2,189 per tonne on February 16 of this year.

"The majority of alumina goes into the production of aluminium, however, no aluminium is currently produced in Jamaica primarily because of our high relative cost of electricity, which has made the production of aluminium unfeasible," Small-Ferguson said.

... Natural gas plan critical aluminium production

Researcher and investment strategist Ramon Small-Ferguson says plans shifts Alpart from its dependence on heavy fuel oil to the less expensive natural gas to power its operations is also critical in improving the competitiveness of the plant and increasing the potential for aluminium production.

"JISCO's acquisition of Alpart has further increased China's position in the global bauxite/alumina/aluminium industries," the senior manager stated.

"China has less than a fifth of the world's population and one seventh of its economic output yet produces nearly half the aluminium output, largely for its own consumption. However, pollution concerns in China are now pushing companies such as JISCO to shift the expansion of its mining efforts overseas," Small-Ferguson posited.

China's huge demand for commodities such as aluminium is a result of the country's rapid expansion of its industrial production since the Global Financial Crisis and the resulting infrastructure development that has complemented this expansion, he said. We believe that resulting from China's continued efforts over the last few years to change its economic model towards a greater consumer orientation, the pace of industrial production will be necessarily slow, and the associated demand for aluminium may also fall over the medium to long term.

Improving outlook

"A modernised plant, along with higher aluminium prices, greater efficiency, as well as a favourable tax regime offer a much more favourable outlook for the St Elizabeth plant and the surrounding linkage industries," Small-Ferguson maintained.

"Ultimately, however, if China is successful in its attempt to reorganise its economy and reduce its reliance on production and exports, the long-term prospects for both aluminium prices and demand could be adversely impacted," he added.