Recent climate agreements may add to the existing base metals slump, but the continued depression in oil prices is also creating room for a new-look Noranda says Philip Baker, an independent management consultant.

Baker was a member of the 2008 Government of Jamaica (GOJ) team that negotiated with Noranda Aluminum Holding Corporation (NAHC) President and CEO Layle K “Kip” Smith in concluding that year’s agreement. He tells the Jamaica Observer that several rounds of very tough negotiation must now necessarily ensue in seeking agreement around the bauxite levy and planned adjustments to mining operations at the company’s St Ann plant.

The consultant states that new negotiations will spin on three key issues (i) the base metals market in 2015; (ii) key developments shaping the post-2015 base metals market; and (iii) Noranda’s need for “disciplined value stream management”.

On January 13, NAHC – which is Noranda Bauxite Limited’s (NBL) parent company – announced several cost-cutting actions including the slashing of 190 jobs.

The company also proposed that more job cuts and a planned cutback in its refinery’s operations on or before March 12, 2016 might possibly be put off if it could firstly “negotiate meaningful and substantial fiscal regime relief with the Government of Jamaica (GOJ) (including tax and production levy relief)”.

NAHC has continually expressed dissatisfaction since an arbitration panel ruled in December that its subsidiary, Noranda Bauxite, should pay the GOJ US$5.67 per dry metric tonne (DMT) as a production levy for mined bauxite. The charge is about twice the level of what they have asked the GOJ to settle at.

Additionally, the company said in a release issued on January 13 that it is hoping for “meaningful and substantial cost reductions at the alumina refinery in Gramercy, Louisiana and the bauxite mining operation in St Ann, Jamaica (including but not limited to, cost savings resulting from workforce reductions); and thirdly, secure suitable replacement volume for alumina currently provided to the New Madrid smelter”.

Baker states the first factor impacting Noranda is the slump in the base metals market, with segments of the metals complex (eg aluminium, zinc, copper, lead, etc.) now struggling under the weight of oversupply, a fact reflected in ballooning inventory levels and depressed prices.

“The global economy as at the end of 2015 has not been able to deliver sustained stellar economic growth in the aftermath of the great financial recession that began in 2008. On the contrary, the pace of GDP growth has decelerated markedly in China, Brazil and other emerging markets that once anchored the commodities super cycle that characterised the global base and precious metals markets,” Baker notes.

Events in the arena of new policy have also affected market conditions, he states. These include the successful conclusion of the United Nations Framework Convention on Climate Change (UNFCCC) Conference of the Parties 21 (COP21) meeting in Paris, France in early December 2015.

Baker points out, “A significant part of COP21 is the adoption of ambitious targets for decarbonising the global supply chain for transportation, manufacturing, logistics, construction and agriculture. Just weeks after the conclusion of COP21 and amid generally anaemic market conditions across the global commodities market, some US$400 billion of capital expenditure has been either cancelled or postponed by companies operating in the hydrocarbons business.”

The action, he notes, is expected to remove from future production approximately 2.9 million barrels of oil equivalent per day.

Meanwhile, Baker adds, shale energy developers in the US are no longer shackled by an export ban and are currently moving with dispatch to deliver cargoes to Europe and Asia, availing themselves of very attractive shipping rates.

There is also, he says, the anticipated official re-entry of Iran (and with it some 600,000 barrels of oil per day) into the global petroleum market. “Small wonder, therefore, that both the Brent and West Texas Intermediate oil benchmarks have slumped to below US$30 per barrel — the lowest level since about 2003,” he comments.

On the other side of the equation, Baker states that COP21 “will very likely engender a virtuous and sustainable wave of investment in green technology applications, heralding the expansive use of lighter, recyclable and less carbon-intensive metals such as rare earth elements, titanium, aluminium and graphene (a layer of pure carbon said to be 100 times stronger than steel)”.

VALUE STREAM MANAGEMENT

Concurrently, the analyst states that in the aftermath of COP21 and against the backdrop of persistently depressed conditions across the entire global commodities complex, “Noranda Aluminum Holding Corporation and its subsidiary Noranda Bauxite Limited (NBL) would do well to return to the negotiating table with the GOJ to seriously chart a post-2015 business model and operational framework.”

All parties should consider, he said, “a judicious recalibration of the fiscal regime structure… being mindful of the fact that Noble (at Jamalco) and UC RUSAL are being assailed by similar disruptive market conditions”.

Noranda, Baker notes, for its own part “must demonstrate the necessary resolve in using the windfall resulting from substantially lower oil prices to refresh and reinvigorate its entire value stream, stripping out deficiencies, obsolescence and boosting total factor productivity (extending the existing Productivity Incentive Scheme to include railcar utilisation, heavy goods vehicles rotation, port management, etc.)”.

In addition he states, NBL “would do well to adopt an end-to-end decarbonisation of its overall value chain, seriously considering a solar-powered approach to drying bauxite for shipping. Developments in flow-battery technology hold out interesting prospects in this particular regard”.

“Lastly,” Baker states, “NBL should urgently embark on finding creative trading modalities to profitably move to market the significant dry metric tonnage of bauxite that is now languishing on the stockpile consequent on the recent bankruptcy filing of a major third-party customer.”

NAHC disclosed last week that the filing of a case under Chapter 11 of the Bankruptcy Code by a significant bauxite customer, Sherwin Alumina Company, LLC, might result in additional material reductions to mining plans at NBL in St. Ann.