VENEZUELA'S ALUMINUM INDUSTRY IN CRISIS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001001 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MKACZMAREK NSC FOR RKING USDOC FOR 4332 MAC/ITA/WH/JLAO E.O. 12958: DECL: 07/31/2019 TAGS: ECIN ECON EFIN EIND EINV ELAB EMIN ENRG EPET ETRD, KCOR, VE SUBJECT: VENEZUELA'S ALUMINUM INDUSTRY IN CRISIS REF: A. CARACAS 157 ¶B. CARACAS 339 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The GBRV has agreed to a number of labor demands after days of protests shut down the industrial city of Puerto Ordaz. After years of GBRV mismanagement, state-owned aluminum companies suffer from deep structural inefficiencies. Low aluminum prices and rising production costs have exacerbated these issues. The GBRV has few options to resolve the crisis and none of them address the fundamental problems in the aluminum sector. In the short-term, the government is likely to buy off workers with more government handouts, but future bailouts only promise to pour more money into an industrial black hole. End summary. -------------- GBRV GIVES IN TO LABOR DEMANDS -------------- ¶2. (SBU) On July 19, Basic Industry and Mining Minister Rodolfo Sanz agreed to a series of labor demands after several days of marches paralyzed the streets of Puerto Ordaz. Workers from the state-owned aluminum companies Venalum, Alcasa, Carbonorca, and Bauxilum demanded social benefit payments, meal tickets, and vacation time. (Note: All four companies are part of the Venezuelan Corporation of Guayana (CVG). Founded in 1960, CVG is a state-owned enterprise under the Basic Industry and Mining Ministry that holds fifteen companies and employs over 18,000 people. End note.) ¶3. (SBU) On July 17, Sanz told workers to be patient because the aluminum companies were "in chronic deficit." The protests continued unabated until a July 19 meeting between Sanz and union leaders. According to published reports, the GBRV agreed to pay the aluminum workers 213 million bolivars (BsF) in social benefits (approximately USD 99 million at the offical 2.15 BsF exchange rate),replace company leadership, establish a technical group to reevaluate company priorities, and invest USD 183 million to rescue Bauxilum. Sanz told union leaders that President Chavez would unveil a large scale investment plan for the Guayana region in the coming weeks, and announced additional government bailouts for Interalumina (180 million BsF) and Alcasa (150 million BsF). ;Finally, Sanz promised to renegotiate collective bargaining agreements that expired months ago. -------------- AN ALUMINUM INDUSTRY IN CRISIS -------------- ¶4. (SBU) The GBRV has now rescued the state-owned aluminum companies twice this year. (Note: In March the GBRV announced a stimulus package and plans to reorganize CVG. End note.) These companies face rising production costs during a period of depressed international aluminum prices. In recent press reports Minister Sanz claimed that the production costs in the Guayana region top USD 3700 per metric ton. The international price for aluminum is around USD 1600 per metric ton. Based on these estimates, GBRV-owned aluminum companies lose USD 2100 for every ton of aluminum they produce. ¶5. (C) In a July 21 conversation with EconOff, private sector aluminum entrepreneur Jorge Monch (strictly protect throughout),said that state-owned Alcasa "has completely collapsed." Monch, who owns the Alucenca aluminum plant in Cagua, said that "maintenance has stopped, costs are increasing, and production is decreasing." Several years of GBRV mismanagement has destroyed the once profitable company, said Monch. Over the last several years, Alcasa's GBRV-appointed leadership has hired new employees based on their political loyalties rather than their technical expertise, a process that has fattened Alcasa's payroll and reduced efficiency. "It's the same thing Chavez did to the petroleum companies to gain control of the unions," Monch said. Similarly, inexperienced workers were promoted to managerial positions based on their political allegiances. Alcasa's directors also created socialist cooperatives within the company that stole raw materials. Monch estimated that CARACAS 00001001 002 OF 002 Alcasa once produced 200,000 metric tons of aluminum per year but now produces just 140,000 tons. He added that Venalum is also deteriorating under similar government mismanagement, albeit at a slower pace. Monch estimated that Venalum's annual production has dropped from 430,000 metric tons to 410,000 metric tons. ¶6. (C) Monch said that Chavez has two options in response to the ongoing crisis in the aluminum sector: 1) fire the striking workers or; 2) pay them off. Neither of these options will solve the aluminum industry's deeper inefficiencies, Monch said. He highlighted an important difference between labor issues in the aluminum sector and in the petroleum sector. According to Monch, labor issues in the aluminum sector are more difficult to solve because aluminum production costs are comparatively high. "The GBRV bailouts are unsustainable because the aluminum companies are a bottomless pit," he said. Nevertheless, Monch predicted the GBRV will give laborers "a little caramel," (i.e, a little sweetener),in the short-term. -------------- A DIFFICULT BUSINESS ENVIRONMENT -------------- ¶7. (C) Monch's own aluminum business suffers from the pervasive corruption in Venezuela. Monch said that third parties call him "a few times a week" to sell him stolen aluminum. In order to export aluminum chips, he said his company must bribe Puerto Cabello officials to open the gates for his trucks, bribe dock workers to unload his trucks, bribe other workers to load the aluminum into shipping containers, and bribe the National Guard along the way. Monch estimated that he has USD 1 million in aluminum awaiting export in Puerto Cabello due to inefficiencies at the port. Monch was pragmatic about these challenges. He told EconOff that he had received a loan from the state-run development bank Banfoandes worth several million dollars. He used the loan to buy raw aluminum from Venalum but said he had no intention of paying it back. "In Venezuela, everyone is trying to screw everyone else," said Monch. "They screw me and I screw someone else." ¶8. (C) Three years ago, Monch was forced to renegotiate his labor contracts after several men who claimed to be "union representatives" appeared at his plant. Monch told the men that the plant already had union leaders and asked them to leave. The next day two buses arrived with over one hundred men armed with pistols, bats, and other weapons. When the armed men took control of the plant, Monch called the local police for help. The police did not respond, so Monch called the governor of Aragua, a personal friend. The governor said that if he forced the men to leave the plant he would be removed from office. Eventually Monch agreed to negotiate a new labor agreement that included a series of costly union provisions. To regain control of the plant, Monch paid disloyal workers to quit. He said that only one disloyal employee remains because he is asking for too much money. Monch now operates the plant with half the number of employees, but he has good relations with the GBRV, and he even showed EconOff a "Customer Satisfaction Survey" that he fills out for Venalum on a monthly basis. -------------- COMMENT -------------- ¶9. (C) For years, management decisions in the aluminum sector have been based on political expediency rather than economic efficiency. Now the government-controlled companies face insurmountable production costs. These structural fissures are particularly evident at a moment of low international aluminum prices, but it is doubtful that the aluminum companies would be profitable even if aluminum prices were high. In response to this crisis, the GBRV does not have many good options. While government bailouts may postpone the crisis momentarily, they will not solve the underlying structural inefficiencies in the state-owned aluminum sector. In the short-term, Chavez is likely to appease the workers with government handouts in order to buy time. End comment. CAULFIELD