GUYANA'S BAUXITE INDUSTRY SINCE PARTIAL NATIONALIZATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040056-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2006
• Sequence Number: 56
• Publication Date: December 1, 1972
• Content Type: IM

 D -RECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Guyana's Bauxite Industry
Since Partial Nationalization
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ER TM 72 1 73
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December 1972
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1972
INTELLIGENCE MEMORANDUM
GUYANA'S BAUXITE INDUSTRY
SINCE PARTIAL NATIONALIZATION
1. Since taking over the bauxite and alumina properties of the
Aluminum Company of Canada (Alcan) on 15 July 1971, the
government-owned Guyana Bauxite Company (GUYBAU) has been unable
to prevent a sales decline. Its marketing problem is the result of reduced
Alcan purchases coinciding with generally weak aluminum demand and
excess bauxite supplies. GUYBAU's difficulties have hurt the economy and
delayed expected government moves against Guyana's other bauxite firm,
Reynolds Guyana Mines (RGM) -- a subsidiary of the Reynolds Metal
Company. This memorandum discusses GUYBAU's performance, its
implications for RGM, and the impact on Guyana's economy. It also
examines the repercussions in other Caribbean countries and assesses the
short-term outlook for Guyanese and world bauxite sales.
Background
2. Prime Minister Forbes Burnham nationalized Alcan's properties
as part of his program of greatly expanding government control of resource
exploitation. Alcan's subsidiary, the Demerara Bauxite Company (DEMBA),
was Guyana's largest enterprise, having some 5,000 employees and sales
estimated at US $55 million in 1970. With nationalization, the government
gained control of nearly three-fourths of the bauxite mining and all of the
alumina refining capacity. RGM owns the remaining bauxite capacity.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence. I
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3. Under the nationalization settlement, Guyana agreed to pay $53.5
million - approximately the book value of the properties - over 20 years,
with an effective interest rate of 4.5%. The first annual payment, about
$4.7 million less taxes of $1.25 million owed for 1971, is due on
31 December 1972. Guyana obtained the right, however, to defer
temporarily up to 40% of the first four annual payments and 30% of the
remaining payments. Alcan refused to make a long-term commitment to
purchase GUYBAU's output but agreed, for the remainder of 1971, to
market the calcined bauxite* and purchase a little more than one-half of
a normal six-months' output of metal-grade bauxite and alumina.
Developments Under Government Ownership
4. GUYBAU initially had considerable difficulty maintaining output
at the former Alcan facilities. Material supplies were nearly exhausted, and
DEMBA's failure to carry out routine maintenance in the final months had
lift the facilities in a seriously rundown condition. Moreover, some 50-75
departed managers and technicians were replaced, mainly by upgrading
Guyanese employees. Operational problems nevertheless appear to have been
overcome. For example, output of calcined bauxite - which is easily
marketed because Guyana has a virtual world monopoly -- has been
increased above the pre-nationalization level.
5. Alcan has bought less of the metal-grade bauxite and no alumina
this year, and finding new customers has proved difficult. GUYBAU's sales
efforts have been hampered by the market's domination by Alcan, Reynolds,
and four other multi-national companies, which control most of their supply
sources. Sales also have been impeded because long-term contracts govern
most other transactions. This practice initially limits the market for new
sellers to customers making up temporary shortfalls from their normal
suppliers. Even in this market, GUYBAU is in a poor competitive position
because it is a high-cost producer. These problems have been aggravated
by the excess supplies and weakening prices resulting from the recent
sluggish growth of North American aluminum production (see Figure 1).
6. Because of these handicaps, Guyana has had little success in
finding permanent customers in Japan, India, Yugoslavia, and the
Communist countries through diplomatic channels. Resort to commercial
channels with the help o. Gerald Metals Company of London also has been
largely fruitless. In the second half of 1971, GUYBAU managed to sell
50,000 long tons of metal-grade bauxite and - with the aid of a sharp
price cut - 55,000 tons of alumina to transitory customers, mainly
Calcined bauxite, made from exceptionally high-quality ore, is sold for non-metallic uses.
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1967=100
150 ._. .
Figure.1
Trends in Free World Bauxite and
Aluminum Production
Free World
Bauxite Production
120.
110
Free World PrimaryAluminum Production
North American Aluminum.
Production
--
1967 100
1967 88,? 69' 70 71
lncludinp the UNted States, Canada, and Maxico,
Communist countries. Alcan's purchases and these sales permitted alumina
output to be maintained and limited the productic , decline for metal-grade
bauxite t:: one-third (see Figure 2.) Moreover, GUYBAU prevented a
significant drop in the enterprise's sales revenues by boosting prices of
calcined bauxite about 20%. Total sales amounted to $26 million during
July-December, compared with an estimated $28 million during
January-June, and GUYBAU earned an after-tax profit of $3.5 million.
7. Lack of customers has brought further production cuts and a small
revenue decline in 1972. Output of calcined bauxite has slipped a little
but remains above the pre-nationalization level, thanks to GUYBAU's
aggressive new marketing agent, Philipp Brothers of New York. Although
buoyed by transitory purchases of 600,000-900,000 tons by Alcan and the
Harvey Aluminum Company, output of metal-grade bauxite probably will
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Output of the DEMBA/GUYBAU Facilities
Thousand Long Tons
Metal Grade Bauxite
1300
1970 1971 1972 1970 1971 1972
tat 2nd Eat. 1st 2nd Est.*
Half Half Half Half
At Annual Rates At Annual Rates
610 600 s~ 630
1970 1971 1972
1st 2nd Eat.
Half Half
At Annual Rates
reach little more than one-half of normal. Alumina sales may be confined
to the 170,000 tons (about 55% of normal output) that the USSR and
the People's Republic of China bought through August at close to
GUYBAU's cost. GUYBAU's total sales in 1972 are likely to approximate
$49 million, a 9% decline from 1971.
Aluminum Company Situations
8. GUYBAU's difficulties have delayed the expected nationalization
moves against Reynolds' properties. The delay has given Reynolds time to
reduce its already small degree of dependence on Guyanese bauxite. The
Reynolds operation normally produces 1.2 million tons of bauxite annually
(about 15% of the company's total output), and about two-thirds is sold
to other firms, particularly Alcan. During 1972, Reynolds has cut back
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its Guyana output by about one-third and taken steps to expand capacity
at its holdings in Jamaica, which provide one-half of its supplies, and in
Haiti. Reynolds al!;o has taken a long-term option on 50 million tons of
Australian alumina and pursued negotiations with Surinam fcr jointly
exploiting its large bauxite deposits.
9. Alcan has been able to achieve substantial cuts in purchases from
GUYBAU without pinching its bauxite supply. This was possible even
though DEMBA originated roughly one-third of its output, including
supplies for a Quebec alumina facility designed to process the type of
bauxite found only in Guyana and a few other countries. Alcan met its
essential requirements for Guyanese ore by stepping up purchases fror,'
RGM. Adjustment was facilitated by the weak demand for aluminum, which
forced a 15% drop in the company's aluminum output.
Impact on Guyana's Economy
10. DEMBA's nationalization has put Guyana's budget and balance
of payments under pressure, but matters are not serious enough so far to
hurt Burnham politically. Anticipating the takeover, DEMBA paid no taxes
in the second quarter of 1971, and GUYBAU apparently was too short
of cash to make more than a token payment. Reduced receipts from the
enterprise kept 1971 government revenues 6% below the 1970 level and
helped to boost the deficit from 20% of expenditures to 31%. Reduced
sales by both GUYBAU and RGM have cut government revenues further
in 1972. Moreover, GUYBAU's tax-paying ability is limited by its obligation
to pay Alcan at least $2 million on 31 December. If the government has
spent as much as originally planned, the 1972 deficit may reach 40% of
outlays. As was true last year, most of the deficit probably is being financed
with borrowing from the banking system.
11. The deteriorating foreign investment climate has reduced capital
outlays and is holding this year's economic growth rate well below the
4% average of 1969-71. Although significant consumer price increases were
not in evidence up to May 1972, the enlarged government deficit probably
has caused inflationary pressures recently. So far, the balance of payments
has not been strained seriously (see the table). In 1971, reduced bauxite
and alumina sales and a small net outflow of direct private investment were
outweighed by booming sugar sales, government short-term borrowing, and
transfer of DEMBA's pension fund from Canada to Guyana. In 1972,
reduced profit remittances probably have helped to offset the decline in
bauxite and alumina sales to something like $57 million, compared with
$67 million in 1971. Nevertheless, foreign reserves dropped about 10% from
December 1971 to August 1972 and probably will remain below the 1971
figure.
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Guyana: Balance of Payments
Payments balance
-4.7
-1.6
5.2
Current account balance
-13.6
-19.9
-4.6
Trade balance
6.6
-4.1
6.4
Exports (f.o.b.)
123.8
129.0
137.1
Of which:
Bauxite and alumina
60.1
69.2
66.8
Imports (c.i.f.)
117.2
133.1
130.7
Investment income
-18.0
-14.8
-14.0
Other services
-2.2
-1.0
3.0
Capital account balance
13.6
16.5
14.4
Net receipts of official
capital
9.9
10.4
13.8
Direct investment
1.3
0.3
-1.0a
Loans
8.6
10.1
14.8a
Net receipts of private capital
3.7
6.1
0.6
Direct investment
8.7
6.1
-4.0
Other
-5.0
0
4.6
Errors and omissions
-4.7
-0.7
-6.7
Special drawing rights allocation
0
2.5
2.1
a. Doe: nc' reflect DEMBA's nationalization, which has the cffent of reducing direct investment by
$53.5 million and increasing loans by a like amount.
Repercussions in Other Caribbean Countries
12. GUYBAU's difficulties have provided an object lesson for
nationalists in the other four Caribbean-area bauxite-producing countries --
Jamaica, Surinam, the Dominican Republic, and Haiti. The governments
of Surinam and particularly Jamaica have been under some pressure from
militant black nationalists and other opposition groups to claim greater
participation in resource development and to obtain larger profit shares from
the foreign-owned bauxite operations. GUYBAU's experiences, however,
would appear to make nationalization considerably less attractive to all but
the most ardent nationalists in the Caribbean area. Nevertheless, these two
governments have continued to seek greater bauxite tax revenues and
increased local processing of bauxite to provide more jobs. To this end,
they have engaged during the past year in joint conferences 'co exchange
information as a means of improving their bargaining positions with the
companies.
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13. Contrary to most observers' expectations, Guyana's nationalistic
moves have not hurt the other Caribbean bauxite producers. Although the
Caribbean area's share of Free World bauxite output slipped from 50% in
1970 to 45% in 1971 (see Figure 3), the drop reflects weaknesses in the
Figure 3
Free ;World Bauxite Production,
by ,Mayor Country
Percent
~,l,,0uyann',',
Hdtl and
Dominldan Republic
North American aluminum market and GUYBAU's difficulties rather than
diminishing company confidence in other Caribbean countries. In Jamaica,
a $300 million expansion program initiated by Alcan, Reynolds, and other
US aluminum companies in the late 1960s apparently is proceeding on
schedule. Reynolds still plans a large expansion of its Surinam operation.
This investment could total $400 million over the next 10 years, eventually
boosting Surinan,'s bauxite output about 20% and greatly increasing the
share processed into alumina. In addition, a 10% expansion of Reynolds'
operations in Haiti probably will be initiated during the next year or so.
Short-Term Outlook and Conclusions
14. GUYBAU's sales prospects over the next two or three years are
not good. The company's present position will be improved a little if Alcan
follows through on its recent promise to increase purchases of metal-grade
bauxite in 1973-74. GUYBAU probably will also benefit from somewhat
larger sales of metal-grade bauxite and alumina to other customers as world
demand for aluminum strengthens. Nevertheless, its lack of permanent
customers and rela.vely high prices probably will help to keep total sales
from rising significantly above the peak 1970 level.
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15. The outlook for RGM is less clear. As an ardent nationalist,
Burnham is determined to gain at least majority control over RGM. His
resolve probably has been strengthened by Reynolds' cutback of the
Guyanese operation while planning expansions in Jamaica, Surinam, and
Haiti.
Nevertheless, GUYBAU's problems may cause
him to continue to hesitate. Burnham presently may not wish to risk loss
of Guyana's sugar quota in the US market, which brought a $6 million
subsidy in 1971, or of US economic assistance, which has averaged $7.5
million annually over the last decade.
16. Nationalization, however is a highly popular politica? issue, and
a new move in this direction would enhance Burnham's image at the expense
of the principal opposition leader, Marxist Cheddi Jagan. When Burnham
does press his demands, nationalization of the RGM properties seems the
likely outcome. Reynolds has even less economic reason than Alcan had
to accept the terms and probably will reject them. The book value of
Reynolds' Guyanese properties is only about $20 million, of which $14.3
million is covered by a US government expropriation guaranty. Moreover,
Reynolds believes that any display of weakness in the face of government
pressure would expose its much larger holdings in Jamaica to similar
nationalistic demands. If RGM is taken over, Burnham is likely to offer
compensation along the lines of the Alcan settlement. Nevertheless, the
company may well file a claim under its expropriation guaranty, arguing
that the compensation is neither prompt nor adequate and that in any case
Guyana probably will be unable to pay it.
17. Even if Burnham refrains from nationalizing the RGM properties,
Guyana's economy will remain depressed over the next two or three years.
Although bauxite and alumina sales may recover to the 1970 level, sluggish
export earnings will retard expansion of the economy, which is heavily
dependent on imports for materials, fuels, and capital goods. Growth also
will be held back by the lack of private foreign capital inflows, which have
been largely responsible for gains made since the early 1960s. Although
Burnham can depend on some foreign assistance, budget strains will severely
limit the government's ability to expand public investment. The economic
situation will be even worse if Burnham nationalizes the RGM properties;
because Reynolds would be unlikely to buy Guyana's bauxite and
compensation payments would be larger. Thus, whether or not RGM is
taken over, prospects are for slow growth, balance-of-payments strains,
and - perhaps -- mounting inflationary pressures.
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18. In view of Guyana's troubles, other Caribbean governments seem
unlikely to follow the nationalization path in the next few years.
Nevertheless, they will be carefully watching GUYBAU's performance and
the outcome of the prospective nationalization moves against Reynolds. In
(doing so, they will be comparing the benefits of their policies of restraint)
with those that Guyana might obtain. Any substantial progress by Guyana.
will stimulate their demands for greater revenues and possibly bring pressure
for partial nationalization. On the other hand, if Guyana's nationalization
actions continue to be self=defeating economically, the countries' demands]
probably will be tempered. In either case, domestic political pressures to
follow Burnham's example may force some governments to take more
aggressive positions. Surinam and Jamaica already have announced, for
example, that any new bauxite and alumina undertakings must provide for
government equity participation.
19. While a new nationalistic action by Guyana will disturb the
aluminum companies, it probably will affect their actions only temporarily.
Whether or not RGM is nationalized, the companies probably will press
on with their expansion programs in the other bauxite-producing countries
in the Caribbean area. Although the Caribbean area's share of Free World
bauxite output probably will slip to 40%-45% by 1975, this will mainly
reflect company efforts - begun before the Alcan expropriation - to take
advantage of the more favorable bauxite reserves of Australia and Africa
rather than immediate fears of a domino effect from Guyana's
nationalization moves.
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