Latinnews Archive
Latin American Economy & Business - 15 July 1988
Venalum gets new partners;EXPORT EARNINGS ARE EXPECTED TO BE HIGH
According to government predictions, primary aluminium production this year will increase to 455,000 tonnes compared with 427,000t the previous year, thus giving substance to hopes of boosting output capacity to 2m t a year by the 1990s. Officials estimated in mid-June that 262,000t of this total would be exported, while the rest would be sold to the domestic market.
The country's two main smelters, Venalum and Alcasa, are joint ventures, partly owned by the government and foreign industrialists. In Venalum, the partners are a group of Japanese industrial concerns -- Showa Denko, Kobe Steel, Sumika Aluminium, Mitsubishi Metals and Ryoka Light Metal Industries; Alcasa is a joint venture with Reynolds, the US company. Venalum plans to ship most of its exports (160,000t) to its Japanese partners, with the rest going to General Motors, ASV/Hydro, Wells Aluminium and the National Aluminium Corp of Pittsburg, US. Alcasa's planned exports of 47,000t of primary aluminium for this year will go mainly to Aleurope of Belgium, Alunasa of Costa Rica and Reynolds.
The government's plans for increased exports of aluminium are based on the argument that the low cost of electricity needed by the smelters will make production cheap, while it will also be making use of the country's proven reserves of more than 200m t of bauxite. It claims that it could earn US$ 3bn a year from exports if production were to increase. This would help to achieve the government's goal of reducing the country's present heavy dependence on oil for foreign-exchange earnings. Petroleum accounted for 87% of a total export income of US$ 10.3bn in 1987.
* New agreements
To this end, the government is carrying out a major expansion of the aluminium industry by seeking to negotiate more joint-venture agreements with foreign companies. It recently announced two important developments.
In the first, on 9 June, the president of the state-owned Corporacion Venezolana de Guayana (CVG), Leopoldo Sucre Figarella, revealed that an agreement had been reached with Italy to build a smelter in Puerto Ordaz, the centre of the national aluminium industry, 700km southeast of Caracas. He said that work would begin in October on 'one of the world's biggest smelters' (it is expected to reach a production capacity of 360,000t a year), at an estimated cost of US$ 772m.
The two Italian state companies involved in the venture, Italimpianti and Techint, will own 49% of the shares; an equal proportion will be owned by the government, and the remaining 2% by local investors.
A second series of negotiations, involving the US company Alcoa, CVG and Sural, a privately-owned local company, reached a crucial stage towards the end of June, when the superintendent of foreign investments, Juan Carlos Perez-Segnini, announced that the government hoped to conclude an agreement in August or September. This would cover the construction of a new 120,000t-capacity plant, which will be 80%-owned by private investors and 20% by CVG. The plant, which will use Alcoa technology, will cost US$ 370m and is to be located in Ciudad Guayana, the centre of the country's heavy industries.
* Setback for exporters
On the negative side, the US Department of Commerce issued a preliminary finding in late June that Venezuelan aluminium wire rod is being sold in the US at below its fair market value. The three affected companies, including Sural, were given 45 days (until 8 August) to appeal against the finding, which effectively prevents them from exporting to the US. However, observers believe that the Commerce Department's decision will be upheld, given past US practice in similar matters and the decline in production which has affected US aluminium industries -- 32% between 1981-86 --, as world prices fail to meet high production costs.
The US decision was echoed by analysts in Caracas, where it was argued that successful reports about exports and earnings from Venalum and Alcasa owed a good deal to subsidies and accounting. According to local analysts, 'for each tonne of aluminium exported, Alcasa received an export incentive of 666 bolivares (US$ 1=14.5 bolivares), an exchange subsidy of 2,300 bolivares and an electricity subsidy estimated at 626 bolivares, that is, a total subsidy of 3,592 bolivares per tonne. That represents 54.7% of profits before tax. During 1976-86, export incentives alone amounted to 1.5m bolivares, with the firm paying taxes for only two of those 10 years.'
Analysts query the fact that such incentives, which normally are temporary incentives to help a firm get started, can be maintained and become permanent.
Similar analyses of the Venalum financial reports for 1985 and 1986 suggest that a large share of profits has been generated by the rate of exchange used for exports. In 1986, Venalum would have thus generated additional profits of 942m bolivares, or 85% of the increase in profits between 1985 and 1986. This explains how Venalum managed to sell 4.5% less in 1986 compared with 1985 -- 296,420t and 310,397t respectively -- while making in the latter year profits after tax that were 44.3% higher and, at the same time, paying 128.1% more in taxes; the exchange rates used for the US dollar were of 12.17 bolivares in 1985 and 14.94 bolivares in 1986, while the rate at that time was of 7.5 bolivares, until December 1986 when it became 14.5 bolivares.
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