Can Guyana ride the commodity wave?
Stabroek News
March 26, 2004
In surfing, timing is everything. Get too far in front of a wave and you can be crushed in the trough it forms; too late and you are left paddling in the still water it leaves behind.
In business also, anticipating when prices are going up and then rapidly expanding production is key.
Commodity prices are the monster waves that roll through the world economy in multi-year cycles. And in the last year two key commodities for Guyana - bauxite and gold - have seen strong demand and consequent price increases.
Are these sectors ready to take advantage of the commodity wave or will they be left behind?
What is behind the strong commodity demand?
The reason for increased demand for many metals can be summed up in one word: China, where rapid industrialisation has seen spectacular growth in the last five years. Aluminum output has increased six-fold since 1990 and China is now the largest producer.
Aluminum consumption worldwide in 2003 increased by 7.68% to 27.2M tonnes with China's demand growing by 25.2% from 2002.
At the same time alumina, or refined bauxite, used to make aluminum, went up by 7.2% in 2003 with China's imports going up by 22.6%.
In the near term, spot prices for alumina are expected to stay around $370 per tonne, well above the $153 price of 2001. Growth up to 2010 is projected at 4% per year while bauxite output is estimated by some analysts at 2.5% to 3% per year.
Aroaima Bauxite Company(ABC), operating out of Kwakwani in the Berbice River, produces metallurgical grade bauxite and some chemical grade. In the case of the latter this is used in water purification, a more stable market. But demand for this product might increase somewhat if alumina prices go much higher because an alumina bi-product, which works as a substitute, would become too costly.
As for metal grade, ABC will not see the full benefits of recent price increases because of a long-term contract signed with its main customer, a refinery in Point Comfort, Texas run by Alcoa.
However, there are escalators in the contract, which runs until 2006, that have seen prices rise by around 15% from early 2003. Given that the base price had been negotiated to achieve a cash neutral position, this is a welcome development but ABC is also smarting from a strike that set back production and cost it US$500,000 in demurrage costs. Production for 2004 up to the end of February is 205,810 MT, missing the 288,000 MT target. But the original general manager, Morris Stuart is now back in charge and the company is looking to gain lost ground.
In recent months both the Russian company, RUSAL, and most recently Brazilian company Companhia Vale do Rio Doce (CVRD) have been in Guyana showing strong interest in metal grade bauxite. CVRD wants material for their refinery in Para state.
The Brazilians especially seem to be the most promising prospect. It is hoped that documents will be prepared for both sides that could form the basis of discussions.
The main consideration would be increasing capacity. At present ABC has little spare capacity above its current output of 1.5M tonnes per year. Gearing up requires considerable investment and takes time. Most importantly the government is not in the position to fund such projects.
There are also logistical obstacles that will always be strained under increased production. These include the loading basin now being dredged by Boskalis at considerable expense; and the barge system which brings the bauxite down the river, run by JP Knight. If major contracts are signed production levels could justify bringing back the mother ship originally owned by Viceroy shipping.
ABC is a high cost producer with deep overburden covering its reserves. Transportation to barge the bauxite down river and onto the boats is estimated at 40% of costs. As a swing producer it has to take advantage of the current buoyant market.
Whether then ABC can take advantage of the good years depends on how quickly it gears up. This does not have to necessarily be by investment but could take the form of leasing equipment and contracting out stripping as is the case at Linmine.
Joint ventures with the same companies now interested in supplies are said to be one of several options being discussed.
Refractory grade bauxite used to make high temperature ladles and kilns comes from Linmine which is now being managed by Omai.
Linmine is now trying to win back market share lost through years of unreliable supplies. This is being helped by the closure of Brazil production at Caemi.
Costs of production have been significantly reduced mainly through job layoffs while productivity is up. For January and February output was 22,657 MT compared to a target of 20,670 MT. This augurs well for a company which in 2002 only produced 60,000 tonnes, the lowest in fifty years. But the prices have not rebounded due to competition from Chinese producers remaining fierce.
Clouds in the silver lining
Affecting both operations is the price of oil which like the other commodities has risen dramatically in the last year, now hovering around US$40 per barrel. An average bauxite mine uses 2 litres of fuel per tonne of bauxite so fuel costs are a major factor.
And at any one time there are around 100 cargo vessels waiting at Chinese ports to unload. The massive demand for commodities and the delays it is causing is putting unprecedented pressure on ship availability. Shipping costs are up worldwide anywhere from 50% to 100%.
Gold
Prices for gold have gone from a low of US$271 in 2001 to over $400 in recent months. They now hover around the $390 mark and are expected to go higher largely based on the declining US currency.
Gold also seems to have regained its traditional role as a hedge in a time of uncertainty whereas its substitute, the dollar, now weakens on the news of political instability.
The timing is not the best for Omai Gold Mines which did most of its operations during the lean years. Omai is still exploring at five of its properties but is yet to see a substantial enough find. In that case the operations would close by mid-2005 but the fact they would still be involved with Linmine means not all the avenues would be closed off. It is worth noting that from 1991 to 2003 Omai paid over US$50M in royalties and US$40M in employees' income taxes as well as purchasing US$221M in local supplies.
Outside of Omai it is difficult to gauge production given the unreliability of gold declarations from smaller outfits. Geology and Mines Commissioner Robeson Benn maintains - to the annoyance of the miners- that only about a third of gold is actually declared. There have also been recent suggestions that gold is being smuggled over to Suriname where the royalties are only 1% compared to 7% in Guyana for royalties and taxes. Gold declarations in 2003 were only 105,483 ozs compared to a target of 143,000 ozs.
Anecdotally, suppliers of mining equipment have seen a pickup in sales. Spads Inc, at Thomas Sreet, sells high pressure pumps between $140,000 to $1.2M and noted that sales increase across the board that is, for small and wealthy miners.
But officials at the ECI Engineering Services at Regent and Bourda which assembles generators at its Friendship Factory explained that orders for mining equipment have significantly decreased over the last three to four years.
Sources there say that engines used in the mining industry continue to be ordered such as the 4 and 6 cyclinder engines for flurry pumps. The reason for a drop in orders according to the source, is the bottom house providers of mining equipment which do not have high overhead costs.
Anecdotally smaller producers are taking the opportunity to upgrade equipment and expand operations. This is partly because of more targeting of diamonds which saw declarations of 412,000 carats in 2003.
Also many miners are coming out of the rivers and investing in excavators for land based operations. This is also seen as beneficial to the environment.
Gold producers will always hold on even in the lean times. But for bauxite, this era of higher prices may prove to be a crucial juncture in whether it is going to continue to be a burden on the economy or contribute to the bottom line.