WE all agree that the bauxite industry is critical to the Jamaican economy. As such, we expect it to maximise its contribution towards the growth of Jamaica’s GDP. The recent challenges in the industry provided Jamaica a unique opportunity to exploit a compelling investment. Some would say this was a once-in-a-life opportunity for Jamaica to control its destiny in the bauxite industry. It was given the chance to soften the harsh contour of the economic environment. It should have structured a deal to buy out both Rusal and Alcoa.

With an economy oscillating around zero per cent growth it is imperative that the bauxite industry becomes an anchor. We expect our Government to spot and anticipate trends and develop strategies to exploit the opportunities these trends provide. Disruptions usually create huge opportunities. Would that the Government would master the art of possibility.

Looking at both Alcoa and Rusal’s divestiture programmes with an amalgam of their restructure announcements is most convincing that they dearly wanted to ‘exit’ certain assets. Jamaica should have seized the opportunity to make a bid. Paulwell cannot posit that this was not doable. The Philippines just borrowed money at less than four per cent. The money could be found.

The two major players in Jamaica, Rusal and Alcoa, were under severe financial pressure. They both needed survival strategies. Investors were fleeing the stocks in droves. The market capitalisation of both was cut in more than a half. They both had abysmal return on assets.

At one stage their market capitalisation was only a fraction of their debt. They had significant debt obligations which their cash flow could not satisfy. Moreover, the industry was plagued by major imbalance between supply and demand. The price of aluminium had fallen from $3,380 per ton in 2008 to $1,675 in 2014. It has since recovered to just over $1,800. It is expected that price will be depressed for a while. It is estimated that there is over 10 million tons in storage equally divided between LME and non-LME warehouses. This will surely help to depress price.

All the major bauxite companies, including Glencore, Rio Tinto, BHP Billiton, have substantially reduced refining and smelting capacity. For the last nine years supply has exceeded demand. However, China which consumes over 45 per cent of the global supply is still expanding capacity. This will further have a negative impact on price. Between 2008 and 2013 the industry shank over five per cent annually.

In Rusal and Alcoa we have two motivated sellers. They both have indicated, in no uncertain terms, that the Jamaican bauxite landscape was no longer strategic to them. The local bauxite industry is a lot more important to Jamaica than to them. Given the financial pressure these companies were under, coupled with the dismal outlook for the industry, it created a perfect storm for Jamaica to offer a price for their local assets.

Let’s take a closer look at Alcoa. It has stated that they are transforming into a value-added producer. Since 2007, they have taken out 28 per cent of their capacity. Things got so bad that they were removed from the Dow Jones Industrial Index. This gives a clear indication that their prospects, going forward, were not encouraging. No company wants to be removed the Dow Jones Industrial Index.

At a Bernstein Strategic Conference, in May 2008, Alcoa clearly indicated that Jamaica was no longer strategic to its operations. It showed where it will be getting its bauxite from in 2009 and Jamaica was included on this chart (chart 14). However, when it showed where it will be getting its supply from in 2013, Jamaica was missing (chart 18). They saw the Jamaican assets as a drag going forward. They revealed on many occasions that they wanted to get rid of their Jamaica operations.

Given that they were so anxious to divest this operation, and they were so starved for capital, Jamaica could have got this asset at a significant discount to its market value. The deal with Noble was struck for $140 million in 2014 when the Alcoa stock price had doubled from 2013. Jamaica could have got this asset way below the price that Noble paid, probably as much as 50 per cent less. If only Jamaica were not this lamentably slow.

At the same time, Alcoa took a $100-million write-off. Logic tells us they would have been willing to take a much bigger write-off when their financial prospects were much dimmer. Maybe as much as $200 million. The Government should be the one selling to Noble. At the price Jamaica would have paid they would be way ahead of the game from day one.

In the case of Rusal their debt overhang made them an ideal seller. In 2012, everyone was wondering how Rusal was going to pay its $10-billion debt due in 2016. Its cash flow could not support it. Furthermore, they had to rely on its dividend from Norilsk Nickel to help cover its expenses. Rusal lost $3.2 billion in 2013. Without forbearance from its banks it would be in deep financial trouble. They were willing to raise cash wherever they could. Since the financial crisis of 2008, Rusal has taken out over 18 per cent of its capacity.

Both at a Goldman Sachs conference in 2012 and at VTB Capital conference in 2013 Rusal disclosed that reopening the Jamaican operations were not imminent. They revealed that they prefer to keep the Jamaican bauxite in reserve and as a backup. Also, it was contingent on the completion of its smelter in Siberia. Needless to say, the plan for this smelter was scrapped. Its poor financial position seemed to be the major contributor for this action. One can easily see that Rusal’s financial condition was desperate, giving Jamaica the ideal chance to make an offer. Jamaica would be dealing from a level of strengths. Buying these assets at a steep discount puts Jamaica ahead from day one.

With these assets Jamaica could go out and form new partnerships. It could sell part of its holdings. It could also find partners who would supply energy, giving the potential to start producing aluminum in Jamaica. This could then be parlayed in rebuilding a robust manufacturing sector. With a target of having this sector contributing 20 per cent of GDP.

Another benefit would be the establishment of a pronounced packaging industry.

Think of the positive impact this would have on unemployment, balance of trade and the current account. Moreover, it would offer immense support in stabilising the Jamaican dollar.

Was an agreement signed with Rusal?

In December 2014, Phillip Paulwell announced that there was an agreement for Rusal to invest $400 million in expanding its operations in Jamaica. However, there is no mention of this on Rusal’s website. As a public company, Rusal is required to issue a press release on any action deemed material. Obviously, a $400-million investment is material.

In the past Rusal had issued press releases on investments as little as $10 million. It is very unlikely that Rusal would want to defy securities law. This investment would be more than the $465-million interest Rusal paid on its debt in 2013.

The public needs an unvarnished account of what transpired. What is the efficacy of this agreement? Could Paulwell tell us why Rusal had not issue a press release on this $400-million investment?

Delroy Warmington is a global fund manager. Comments: dlwarm2001@yahoo.com