#diGoftheday – Alumina In 6-Year Crisis

In the news today we look at major story which got very few headlines, mainly because we already know it. Jamaica’s bauxite and alumina industry is dying long before it’s time.

Today’s Gleaner-Online has the story, which we quote “An executive of one of Jamaica’s major bauxite and alumina companies, Jamalco, says the industry is undergoing its longest crisis in recent memory with not much signs of an immediate reverse.”

The smoke bellowing from Alpart’s factory in St. Elizabeth has been silent since 2008, not to mention Windalco’s Kirkvine in Manchester. Although probably good for the environment, it is difficult to quantify the economic loss from the closure of these two factories to Western Jamaica over the last 5 years.

In fact, Jamalco is the only plant that has not had any form of capacity shutdown during the crisis. This has resulted in and we quote the article, “(Leo) Lambert says energy accounts for 50 per cent of the cost a tonne of alumina. As a consequence, Lambert says other Alcoa plants have to be subsidising Jamalco.”

We have to hope that the executive, Lambert, is not positioning Jamalco for some sort of slow down in the plant or closure. This would be devastating for Jamaica’s foreign exchange earning capability.

The fact that the bauxite industry is in crisis is not under dispute, however diGJamaica does dispute one point in Lambert’s presentation to the Clarendon business community:

“According to Lambert, the price of metal on the London Metal Exchange has fallen to its lowest ever, losing fifteen per cent of its value this year alone.”

The current price of Aluminium on the London Metal Exchange is US$1,740 for the cash contract and US$1,786 for the 3-month contract. The price has fallen exactly 15% on the cash contract as the executive said. However, this price is nowhere near the lowest ever.

The lowest since the crisis would have been US$1,253.50 which occurred on Feb 24, 2009. The price of Aluminium did not return to US$1,700 until July of 2009. Adjusting for inflation, US$1,253.50 in 2009 is the equivalent of US$1,364.

An even lower price occurred in 1993, at US$1,019. However, inflation adjusted, that is now the equivalent of US$1,647.

The substantive point that Mr. Lambert is making however, is that if prices persist at this level, that would make life at Jamalco extremely difficult. DiGJamaica wholeheartedly agrees with that point.

In fact, diGJamaica believes that the widening contango in the aluminium market will force cash prices to rise. This would be good news for Jamalco and Windalco, Jamaica’s only two alumina plants. However, this does not solve the problem of high oil prices.

Contango occurs when the price of future contracts is greater than the price of today’s cash contract. As the contango widens, entities tend to buy more of the metal and put it into storage in anticipation of future price rises, thus creating opportunities for arbitrage.

diG deeper: