SUNS 4506 Monday 13 September 1999

Kingston Sep 7 (IPS/Claude Robinson) -- The fallout from recent mergers of major aluminium companies is likely to result in increased competition among producers in developing countries in the coming months for investment and jobs, according to industry analysts.

Policy makers, union leaders and analysts in Jamaica, Brazil, India, Guyana and the United States agreed that only the most competitive and cost efficient plants would survive in the medium to long-term.

"Plants which are operating in the lowest quartile of production costs will have the best opportunities to succeed in the long term", said Chris Bark-Jones, Chief Executive Officer of INDAL, the major aluminium operation in India.

India "is one of the lowest cost producers in the world with contemporary technology in both alumina and smelter operations" and production "will continue to expand", he told IPS.

Alcoa Inc. and Reynolds Metals Company announced August 19 they would merge under an agreement in which Alcoa would acquire all outstanding Reynolds shares for roughly 4.4 billion dollars

The combined company would have about 120,000 employees working at more than 300 locations in 36 countries. Based on annualized first-half 1999 results, Alcoa and Reynolds together would produce some 20.5 billion dollars in revenues.

Prior to the Alcoa-Reynolds merger, Alcan of Canada, Pechiney of France and Algroup of Switzerland announced they would merge "to form the world's largest aluminium company and global leader in both flexible and specialty packaging."

The three companies had combined 1998 sales and operating revenues of 21.6 billion dollars.

Industry analysts said both mergers were driven by the same globalisation force that has seen consolidations in the financial services sector and of other commodities, such as chemicals and oil. Wall Street and other stock markets also were pressuring companies to show more profits, analysts added.

Primary raw material for the industry is bauxite ore which is processed into alumina - or aluminium oxide - and this is finally smelted into aluminium, a metal widely used in the motor vehicle, aerospace, packaging and canning industries.

The ore is found in Australia and several developing countries such as Jamaica, Brazil, India, Guyana, China, and Suriname. Alumina plants represent major investment and economic activity in countries like Jamaica - the third largest producer of raw bauxite.

In 1998, world output of alumina was approximately 43.7 million tones from a total installed capacity of just over 54.5 million tonnes.

The largest producers were Australia 13.5 million tonnes, United States of America 4.4 million, Jamaica 3.4 million, Brazil, 3.3 million tonnes, India 1.7 million, China 2.8 million and countries of the former Soviet Union 4.8 million tonnes.

The average realised price for aluminium metal in 1998 was $1,568 per tonne down from $1,728 in 1997.

With prices low and some unused capacity in the industry globally, the consolidated entities were expected to cut back on high cost, low-efficient operations and concentrate on plants that offered a competitive edge.

Alcoa closed a plant in Ireland in January and another in Suriname in March-the latter leaving a 40 million dollar gap in government revenue.

Alain J. P. Belda, Alcoa president and chief executive officer said the merger would "permit the greater efficiencies and cost reductions, required by an environment that has seen the lowest prices in many years for our commodity products."

Jacques Bougie, President and CEO of Alcan, and head of the other conglomerate, said the merged entity would establish itself as a "sustainable superior low-cost position" in all sectors of the industry.

Alcoa expected to achieve savings totalling about 200 million dollars from the merger by the end of the second year and Alcan has predicted savings of about 600 million dollars.

Joel Ferreira Nascimento, financial director of the Union of Metallurgists of Sao Luiz which represents workers at Alumar - the main aluminium facility in Brazil- says "what we fear are more dismissals...Alumar's production has grown every year, but the total number of employees has dropped from 3,000 to 1,800 since 1990. Mergers, like privatisation, always eliminate jobs."

Norman Dacosta, Vice President and Deputy Island Supervisor of the National Workers Union - one of the unions representing some 4,500 workers in the industry in Jamaica, believed that those plants and operations "that are high cost producers" could see job redundancies.

Meanwhile Renato Garcia, foreign trade analyst in Brazil's Ministry of Development, Commerce and Industry, said that the mergers could alter international prices of aluminum. "It depends on the strategies adopted by the new groups. They have gained a strong influence over the global market...and that will affect
Brazilian exports."

Jamaica too would now face greater competition for new investment, said Robert Pickersgill, the country's Minister of Mining and Energy. "There could also be delays in investment decisions while consolidation of the new entities is carried," he noted.

At issue in Jamaica was Alcan's plan to build a new 3 million ton alumina plant that, possibly could attract about 800 million dollars in new investment over two years. Alcan presently has two plants in Jamaica, built in the 1950s, with combined capacity of 1.5 million tons.

But the company is pushing for removal of the special tax, known as the bauxite levy, imposed by the Michel Manley administration in 1970s, as a pre-condition for making the investment.

Under the levy, Government receives a percentage of the realized price the companies get for aluminium produced from Jamaican raw material.

Replacing the levy formula with corporate taxation on profits could result in a reduction in revenue, according to official sources, and the Jamaican economy has been short of both investment and tax revenue for the past several years.

Trevor Munroe, President of the University and Allied Workers Union, one of the union leaders pressing the Government to forego the levy and go for the investment said: "Its really giving up what you don't have now to get what you can from the investment.

Alcoa which, with the government, owns 50 per cent of a 1 million ton plant, reportedly was considering adding 500,000 tons if the levy was removed but a company spokesman in Pittsburgh declined to either confirm or deny such reports.

Elsewhere in the Caribbean, Guyana also has sought to reverse socialist policies of the 1970s and woo Alcoa back. The company's interests were nationalised by the Forbes Burnham administration but it has signalled an intention to re-invest in Guyana, via the soon-to-be-privatised Linden Mining company and the Berbice
Mining Company.

India had plans for expanding both alumina and metal production, Bark-Jones revealed, with construction due to start in early in 2000 of a 1 million tonnes alumina plant in which INDAL had a 20 percent stake.

He said that with the real signs of recovery in Asia, the demand for aluminium was likely to grow "in the short to medium term" and global prospects for the industry and cost-competitive firms appeared bright.