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