Venezuela's Guayana aluminum industry mortgaged to Glencore - Instead of an association of symbiosis, state-run Guayana aluminum companies are in a subordinate relationship to Glencore, the world's leading marketer of commodities
Venezuelan state-run aluminum companies have effectively become a kind of in-bond assembly industry working for Glencore, the world's leading marketer of commodities. The Swiss multinational commodity trading and mining company is now the main provider, main client, and sometimes even lender, buying future production in exchange for immediate cash.
State-run aluminum industry has even gone as far as paying Glencore with inputs it has bought to none other than Glencore itself. This is a vicious circle in which Glencore ships bauxite and other raw materials to the Guayana aluminum industry, and then gets to keep the aluminum and the finished goods.
Bauxilum has become an emblematic case. This state-run company has had for the first time to resort to a transnational company to import bauxite, the chief ore of aluminum. Bauxite was imported by Glencore from Brazil, Guyana and from as far away as Indonesia. It then provided it to Guayana state-owned processing industry in the form of alumina, the precursor base of aluminum. Thirty percent of aluminum thus produced was earmarked for none other than Glencore.
The business was really profitable for Glencore, one of the most powerful transnational companies operating in the global commodities market. The firm buys and sells all around the world nearly every commodity, from corn to oil. No wonder it has a local branch in Ciudad Guayana, where it is thriving despite 21st century socialism anti-capitalist diatribes.
A mortgaged future
During the 2009-2010 period alone, Glencore contracted nearly one million aluminum tons in futures. And even before it became a provider, these contracts generated losses for the Venezuelan State running to millions.
Bauxilum has entered into three such contracts with Glencore since 2005 and negotiated three extensions that bind it until 2018. Another contract was entered into in August 30, 2011 pledging supply to Glencore of 1.4 million tons of bauxite in exchange for a USD 120 million loan.
This last agreement was authorized by then Minister of Basic Industries and Mining José Khan, who accessed to this position in the wake of the scandal over the other three contracts, involving his predecessor, Rodolfo Sanz. Shortly after declaring that the contracts were "a perverted vice because transnational companies end up taking hold of state-owned companies and having it all their own way" (July 18 2009), Sanz appended his signature to the contracts at Bauxilum's head office.
There was gross one-sidedness in favor of Glencore in these futures. Instead of paying shipments at the price recorded on the London Metal Exchange as of the last day of the immediately preceding month, as is the usual practice worldwide, the nation agreed for Glencore and Noble Resources, another transnational company, to choose the "best price," that is, the lowest price recorded in the three months preceding each shipment.
Fulfilling these agreements to the letter would mean that as of September 2013 the nation's lost income would have exceeded USD 10 million (exactly USD 10,126,297), just from the sales of 183,600 tons of primary aluminum and 32,400 tons of aluminum cylinders that Alcasa, a subsidiary of the Venezuelan Corporation of Guayana (CVG) conglomerate, agreed to deliver under preferential conditions in a contract signed on December 1, 2009.
As it transpired, much more than that was negotiated with Glencore. State-run companies Venalum and Alcasa pledged around 964,000 aluminum tons under these conditions, the equivalent of almost the entire production of the last three years.
Not only are aluminum basic industries bankrupt, they are mortgaged to Glencore. The 2010 electricity crisis forced the industry to shut down entire sections of the production line, making getting out of debt increasingly difficult. Transformation from bauxite to alumina, for instance, plummeted in six years from almost 2 million tons a year to around 807,000. Against this background, Bauxilum still owes Glencore more than 3 million tons of alumina, the equivalent of the entire production of almost four years at today's production levels.
The contracts are currently suspended because of force majeure, but the state-owned companies still owe part of the USD 540 million advance they received at the time of the signature of the contracts. That sum was deposited in an offshore account held by the state-owned companies in the Lebanon-based branch office of Russian Gazprombank. Pursuant to the agreements, the advance would be paid for with a USD 700 discount on every ton shipped between 2010 and 2012.
Bauxilum is going under
Very few in the industry dare speaking of the Glencore contracts. They became a taboo subject after late President Hugo Chávez came up with the idea of the Socialist Guayana Plan 2009-2019, aimed at transforming raw materials in Venezuela. Transition to socialism included the so-called ‘downstream development.' A vision of a promising, bright future for the Guayana region has been held for the last 60 years, but in reality, dependency from transnational companies is today greater than ever.
Bauxilum's plight is a case in point. Despite official rhetoric to the contrary, data from the SAP enterprise information system, a 2013 audit report (AL-DCPM-XX/12), and reports and statements of accounts issued by the Ministry of Industry from the year 2006 to date, all confirm that Bauxilum is becoming increasingly mortgaged in favor of Glencore.
Crisis is fuelling a vicious cycle. Drowning in debt and crashing production, Bauxilum has agreed to more dollar deductions per ton in exchange for fresh money from Glencore. This allows it to buy time and quell labor conflicts, but it comes at a high price. Bauxilum's future is compromised as it has undertaken to supply Glencore with more alumina over the coming years in exchange for fewer dollars.
Reports and statements of accounts issued by the Ministry of Industry from the year 2001 to date provide convincing evidence of this. The companies that are part of the Venezuelan Corporation of Guayana holding have decreased their production as their relationship to Glencore intensifies. In fact, Bauxilum's installed capacity has plummeted by about 70-80 percent in just six years.
Glencore International representative Roberto Wellisch recently visited the Guayana region. It transpired that he asked Venalum to resume their businesses, which have been suspended since March 2013. The deal now involves the supply of calcined petroleum coke, a critical ingredient in the production of anode coke and a very scarce input in the Guayana region.
In a letter that has leaked from CVG, Palmat –Glencore's representative in Venezuela- proposed to Venalum's logistics manager, Lieutenant Colonel Larry Aragort, placing 200,000 tons of calcined petroleum coke at Venalum's port, from August to March 2014, at a price of USD 450 per ton, in exchange for 1,000 tons of aluminum under the same conditions of the 2009 contract. Venalum accepted the offer on August 2, as stated in communication GL-155/2013.
According to the National Statistics Institute, Venezuela has imported from the US and Brazil 6,941 tons of aluminum out of the 115,000 tons approved by Chávez in procurement request N 065/ of 2010. Unless there is an error, CVG paid for more aluminum than it actually received. Where did the aluminum imported by the Government end up?