It is now clear that the international aluminium industry is in the throes of a downturn.

No one knows how long and deep it will be and what will be the shape of the industry structure when it is through.

The portents are not, at the moment, good.

THE MAIN EVENTS

The players in and major end-use markets such as transportation - GM, Ford and Chrysler, for example - and construction, both of which account for about half of the market for aluminium products, are in a poor state.

No one could have predicted that automobile sales in the United States could have fallen from 17 million in 2001 to 11 million this year. Nor, the extent of the disaster in the housing market which has had the dual adverse effects on the industry of not only reducing demand for aluminium but causing a very significant increase in the price of caustic soda.

The latter resulted from reduced demand for polyvinyl chloride which is itself made from chlorine, a co-product in the manufacture of a significant amount of the world's caustic soda.

Then there was the sharp fall in the price of aluminium from nearly US$3,400 per tonne in summer to US$1,425.

I understand that some operators whose alumina prices are fixed to aluminium declined to fix at the former price because they thought the price would have got to US$4,000 in the summer, and so more money could be made.

The were also announcements of production cuts at alumina and aluminium facilities across the world. Alcoa, for example, has so far announced some 615,000 tonnes reduction in aluminium production, equivalent to some 15 per cent of its total capacity and 25 per cent or 550,000 tonnes per annum of its Point Comfort, Texas, alumina refinery.

[Since this article was written, Alcoa on January 6, announced that the total reduction in alumina production across its refining system would reach 1.5 million metric tonnes per year.]

The giant mining conglomerate, Rio Tinto, (the acquirer of Alcan, and which has just 'escaped' being acquired by another giant, BHP Billiton), indicated that it intends to lay off some 14,000 workers.

[Alcoa announced January 6 that it was cutting 13,500 jobs or 13 per cent of its global workforce.]

In concert with what is going on in the stock markets of the world, several major companies have seen their shares fall significantly.

For example, Alcoa's fell from more than US$30 in the summer to less than US$10 recently.

The major player in Jamaica's industry, UC RUSAL, is seeking to restructure its heavy debt of US$14 billion.

There have been deferrals or cancellations of major investment projects. For example, Rio Tinto has announced the cancellation of a proposed US$10.5 billion aluminium project in Saudi Arabia; and BHP Billiton has announced the cancellation of a major mine investment in western Suriname and its intention to leave that country for good after operating there for many years.

Additionally, there has been a great diminution - or one might say, 'disappearance' - of the 'acquisition heat' which has characterised the industry.

Within more recent times, BHP Billiton's decision not to pursue the acquisition of Rio Tinto - for which it was prepared to pay US$147 billion for a business now valued at less than 40 per cent of this - is perhaps the most celebrated. But there have been a number of others.

WHAT LED TO THE FALL

The main reason for the state of affairs described above is the global financial and economic crisis, said by many to be the worst since The Great Depression.

I would add to this: (a) the acquisition craze which led companies to incur huge debts; and (b) the sapping effects of oil price rises between 2004 and up to recently.

Whatever the causes, the developments are not good for Jamaica as is becoming evident even among those who glibly assert that the country could do without the bauxite and alumina industry.

At the expense of being repetitive, it is worth stating a few facts.

A HISTORY OF CYCLES

The industry is, by far, the largest merchandise export earner for Jamaica, accounting for some 55 per cent - 60 per cent of the total.

More important, it is one of the three major earners of foreign exchange and has been so for decades.

Even persons with the most rudimentary knowledge of the Jamaican economy know that an adequate supply of foreign exchange is necessary to keep the economy going, be it for food, fuel, farming, construction, manufacturing, or servicing our external debt, among other activities.

The industry has been a significant contributor to revenues to Government, through the bauxite production levy, corporate income tax in lieu of levy, personal income tax from workers and royalty.

Between 1974 and 2007, the industry paid some US$3.6 billion as levy; an estimated US$500 million of personal income tax from workers' earnings of US$2.5 billion; and, another US$300 million from royalty and corporate income tax.

For each of the years, 2006 and 2007, levy/corporate income tax amounted to US$100 million plus another US$20 million of personal income tax from the US$100 million earned by the workers in the industry.

Additional revenues have been generated indirectly through the major projects undertaken by the industry such as plant expansions, new mines and residue disposal areas.

A bauxite mining pit in Jamaica. -File

The industry, through the Government companies such as Clarendon Alumina Production Limited and Jamaica Bauxite Mining Limited, has been a source of financing of the Government's foreign exchange and fiscal budgets at critical periods over the last 25 years or so.

This need by the Government - 'executive necessity' if you may - to enable it to finance such things as fuel, food, and to partially address the fiscal budget, will be the subject of another article.

The aluminium industry, as those of us involved in it know, is notoriously cyclical - 'up' cycles and 'down' cycles reflected in prices and/or volumes of production.

Given: (a) the narrow base of our economy; (b) our vulnerability to natural disasters; (c) our almost perpetual resource gap; and (d) our lack of any significant reserves to 'cushion' us, through difficult times, we have to be particularly focused on the consequences of down cycles.

We have experienced three - or four if we separate one that followed another in short order - of these prior to the current ones over the last 33 years.

THE 1975-76 DOWN CYCLE

The 1975-1976 down cycle followed a year of great promise and performance by the international aluminium industry.

The lifting of price controls in the USA and great demand for the product was the backdrop for the Bauxite Negotiating Team to recommend: (a) the imposition of a Bauxite Production Levy; and (b) of an order of magnitude.

The team projected that the market could bear the one cent to 1.5 cent/pound increase in the price of aluminium and not impair the profits of the companies; and, this is more or less what happened. For example, Kaiser Aluminum recorded a profit of US$114.2 million in 1974 versus US$38.7 million in 1973; Alcoa recorded US$174.6 million versus US$100.2 million in the earlier year.

The impact of the levy earnings on Government revenues was immediate and impressive.

From US$27 million in 1973, from a production of 13.6 million, we earned US$188 million from a production of 15 million tonnes in 1974.

But, the good performance in 1974 turned out to be somewhat of a 'false dawn' as a recession (which had been in effect even while the industry was doing well, but 'lagged' in terms of the impact on it) brought on by the quadrupling of oil prices by OPEC in late 1973, the high expenditure on the Vietnam War which led to 'stagflation' and high unemployment adversely affected the industry.

The impact on the Jamaican industry was felt during 1975 and 1976 (exacerbated in the latter year by a series of industrial actions and an accident which led to the closure of the Clarendon Alumina refinery) resulted in sharp falls in production and in earnings from the industry as Table 1 below shows:

business@gleanerjm.com