Opinion
- Editorial- Commentary
William Lucie-Smith
:
Do we need Alutrint right now?
In announcing budget cuts of TT $5.3 million Prime Minister Patrick Manning re-affirmed the Government's commitment to the Alutrint smelter planned for La Brea. Although oil and gas prices have continued their fall since the Prime Minister's announcements the financing for this project appears secure and construction is still planned for next year.
Alutrint is to be owned 60 per cent by the Government through NEC. It is to be financed by a loan from the Chinese Exim Bank and will be built by a Chinese contractor using Chinese technology and Chinese expertise and labour.
Alutrint's CEO Philip Julien said in a recent interview:
"We are also in an advantageous position of having an EPC contractor who is hungry to make this the best, most technically proficient, modern aluminium complex in the western world using China's technology at a competitive price. So they are less motivated by the bottom line. They are very keen to show the world how competitive and technically proficient this aluminium complex is going to be. I think that Alutrint is quite lucky to be in this unique position. We seem to be for the time being, weathering the storm quite well."
This optimism at Alutrint is in very sharp contrast to other companies' views on the prospects for aluminium smelters. Leaving aside all the environmental objections or the alternative uses for our gas and the land it appears that aluminium is no longer in short supply and companies are cutting back.
Trinidad and Tobago no longer has to protest against a possible Alcoa smelter because we can be quite sure that Alcoa will not risk its capital on such a poor economic investment. At present aluminium prices have fallen by over 50 per cent from their high and there is significant excess capacity. Alcoa has announced large cutbacks and cancellation of planned expansion. Cutbacks have also been announced in Bosnia, New York, UK and Texas and world capacity is being reduced by about two million tonnes a year.
Aluminium is viewed as one of the metals most heavily exposed to the economic downturn, and many believe further price collapses could be imminent. Despite rumours of behind-the-scenes buying by the Government, the metal recently closed at a 15-year low on the Shanghai Exchange amid fears of a global consumer and construction slowdown.
In China the visible effects of a property price crisis and sweeping factory closures in the most heavily industrialised provinces have shattered market hopes that metal prices will recover soon.
In a move that spooked many investors, analysts at HSBC unveiled huge downward revisions to their aluminium price forecasts, pointing to the surprising rate of slowdown in China and the slow reactions of smelters in lowering production.
The increasingly dire soundings from the car industry, where plunging sales and sharp production cuts have become daily fare, have also worsened the prospects for a revival in aluminium prices much before 2010.
The business environment has turned dire for many Chinese smelters. The plunge in aluminium prices - they are about 50 per cent down from their peak in the northern summer - has put the metal below the operating cost of about half the companies in the Chinese smelting industry, forcing what analysts at HSBC believe could become a capitulation.
The provincial government in the aluminium smelting heartland of Yunnan in southwestern China said last week it planned to buy as much as one million tonnes of ore and processed metal to try to prop up smelting operations. Commodity traders in Hong Kong said "unusual'' price movements over recent days suggested Beijing had already stepped in to metal markets as a buyer.
Wensheng Peng, head of China research at Barclays Capital, said the logic of any attempt by the Chinese authorities to buy up aluminium stocks was hard to fathom. "Yes, some companies have built huge stocks of metal at high cost and are now in big trouble, but then the Government should just give them money rather than (be) playing in markets,'' he said. He agreed that any discussions of state aluminium purchases were hard evidence of rising panic among Chinese lawmakers.
Unsold inventory of aluminium and other metals has been piling up fast in China, with the surplus expected to rise to more than 1.2 million tonnes next year.
Even greater than that may be the size of the "hidden'' surplus in China - metal supplies that are not declared to the Shanghai exchange but wield a vast material impact on investors' ability to calculate the balance between supply and demand.
China already plays a central role in dictating the prevailing price of aluminium. Seven years ago it accounted for only 15 per cent of global demand, but that has now risen to 34 per cent. By some calculations this figure could be much higher because of unreported sales.
China also has a further 5.8 million tonnes of capacity under construction, due for completion in 2009. In addition China and Saudi Arabia are continuing with plans for a US$3 billion smelter at Jizan in Saudi Arabia. This suggests it will be difficult to know when demand will exceed productive capacity or the smelters will become profitable.
It is in these circumstances that I ask whether the financial feasibility of Alutrint has been re-validated and whether the taxpayer should be making such an investment now.
William Lucie-Smith
is Trinidad and Tobago citizen, Mr. Lucie-Smith is the recently retired Senior Partner of PricewaterhouseCoopers.
.
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This
commentary was originally published by Trinidad Express,
Monday, December 15th 2008
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