GBRV SELLS ALUMINUM TO TRANSNATIONALS INSTEAD OF LOCAL

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000211

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E.O. 12958: DECL: 2020/02/22
TAGS: ECON VE EIND EINT EINV EMIN ENRG ETRD
SUBJECT: GBRV SELLS ALUMINUM TO TRANSNATIONALS INSTEAD OF LOCAL
COMPANIES

REF: 09 CARACAS 1595

CLASSIFIED BY: DUDDY, AMBASSADOR, DOS, AMB; REASON: 1.4(B),(D)


1. (C) SUMMARY: The Venezuelan government (GBRV) is selling
state-produced aluminum to multinational companies and
undersupplying local fabricators, according to a private sector
aluminum entrepreneur. State-owned aluminum companies Alcasa and
Venalum have decreased production following a
government-implemented energy rationing program, although the two
companies still produce enough aluminum to satisfy local demand.
The Basic Industry and Mining Ministry (MIBAM) signed two forward
sale aluminum contracts with Glencore International and Noble
Resources in 2009, and the GBRV has apparently decided to honor
those agreements instead of meeting local demand. According to
February 5 press reports, Alcasa Labor Director Henry Arias asked
MIBAM to cut its supply agreements with Glencore and Noble in half
to supply local fabricators, many of whom have substantially
reduced their output due to raw material shortages. In addition to
these shortages, local aluminum fabricators face a number of other
challenges, including a 100 percent increase in the price of
state-produced aluminum, frequent power outages, minimum wage
increases, and the cancellation of a line of credit from a
government development bank. END SUMMARY.




2. (C) On January 20, private sector aluminum entrepreneur
Jorge Monch (strictly protect throughout) told EconOff that
state-owned aluminum companies Alcasa and Venalum have dramatically
cut their supply of aluminum to Venezuelan fabricators. In 2009,
Venalum produced 430,000 tons of aluminum and Alcasa produced
110,000 tons, but Monch expected Venalum's annual output to drop by
160,000 tons this year after the company shut down 440 production
cells as part of a government-implemented energy rationing program.
(NOTE: On February 5, the press reported that Venalum had shut down
360 cells. Aluminum production is highly energy intensive-the
price of electricity represents 43 percent of the total cost of
production in Venezuela, according to Monch. END NOTE).




3. (C) Nevertheless, Monch speculated that the GBRV was
using the electricity crisis as an excuse for reducing the aluminum
supply to local companies. According to Monch, Alcasa and Venalum
still produce enough aluminum to satisfy local demand. The real
issue, he said, is that the Basic Industry and Mining Ministry
(MIBAM) had signed two large multi-year contracts with
transnational companies and decided to honor those agreements
instead of supplying local Venezuelan fabricators. In October
2009, Venalum signed a USD 1.2 billion forward sale contract to
supply the Swiss company Glencore International with 360,000 tons
of primary aluminum and cylinders over six years, according to
press reports; Venalum signed a similar contract with Noble
Resources for 50,000 tons. Monch said that MIBAM used the money
from these agreements to pay worker salaries and December bonuses
instead of reinvesting in Venalum and Alcasa. "The government is
slowly liquidating the basic industries," Monch said.




4. (SBU) On February 5, the press reported that workers at
Alcasa had asked MIBAM to cut its supply agreements with Glencore
International and Noble Resources in half in order to increase the
aluminum available for Venezuelan companies. The workers made this
request based on Decree 3895, published in the Official Gazette in
September 2005, under which Alcasa and Venalum must guarantee the
aluminum supply for local fabricators. Alcasa Labor Director Henry
Arias told the press that both private Venezuelan companies and
state-owned fabricating companies have been forced to reduce output
because of raw material shortages. According to press reports, the
state-owned company Cabelum, which manufactures cables, only
receives 600 tons of aluminum per month (t/m) instead of the 2,000
t/m it received previously. Aluminum foil manufacturer Alucasa and
Rialca have also been forced to reduce production levels. "We are
sending more than 12,000 t/m to Glencore and Noble...which in other
words means we are fulfilling agreements with multinational
companies at the cost of lowering the supply goals for local

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fabricators," Arias said.




5. (C) Monch, who owns the Alucenca aluminum plant in Cagua,
said that he previously purchased 500 t/m from Venalum under a
contract that expired in December 2009. In January 2010, Venalum
representatives told Monch in a telephone conversation that they
could only sell him 100 t/m in 2010. Monch said he has been
purchasing aluminum from Venalum for over 30 years and that his
company would go bankrupt without at least 307 t/m due to the small
profit margins in the aluminum business. In a conversation with
EconOff on February 10, Monch said that he was hoping to sign an
addendum with Venalum to increase the monthly tonnage of his supply
contract. (NOTE: Monch told EconOff that he coincidentally bumped
into National Assembly Deputy Jose Albornoz on a flight from Puerto
Ordaz to Caracas. Monch explained the desperate circumstances of
his aluminum business to Albornoz, who later told Monch that he had
discussed the situation with President Chavez on January 19 and
that Chavez was going to raise the issue with Basic Industry and
Mining Minister Rodolfo Sanz. END NOTE.)




6. (C) Monch estimated that there are approximately 75 local
aluminum fabricators in Venezuela employing some 7,000 workers.
The owners of the other large aluminum fabricators told Monch that
they have also had their supply contracts with Venalum cut by 60 to
80 percent. In addition to the supply shortages described above,
Monch highlighted other difficulties facing local aluminum
fabricators: 1) the price of state-produced aluminum has increased
by 100 percent following the devaluation announced on January 8
(from 2.15 bolivars per USD to 4.3 bolivars per USD); 2) frequent
power outages, as often as three times a week at Monch's plant in
Cagua, have disrupted production and damaged sensitive machinery;
3) on January 15, President Chavez announced two planned minimum
wage increases for 2010-10 percent in March and 15 percent in
September; 4) the GBRV has cancelled a line of credit for local
producers with the government-owned development bank Banfoandes
after its recent merger into Banco Bicentenario (Ref A). According
to Monch, Banfoandes' former clients have been asked to apply for a
new line of credit with Banco Bicentenario, a process that could
take up to six months.




7. (C) COMMENT: The apparent decision to honor contracts
with Glencore and Noble and sell aluminum to transnational
corporations at the risk of bankrupting Venezuelan companies
highlights a contradiction in the GBRV's socialist development
model: the government claims to support and encourage domestic
production but many of its macroeconomic policies have been
counterproductive to growth. MIBAM is in a difficult position
because it could conceivably face international legal proceedings
if it fails to meet its contractual obligations, but the fact that
the GBRV used the proceeds from its agreements with Glencore and
Noble to pay wages and December bonuses-rather than reinvest in
Venalum and Alcasa-is further evidence of both the insolvency and
mismanagement that is characteristic of many of the large
state-owned companies. END COMMENT.
DUDDY