Recovery in bauxite dependent on China

MUCH HAS been said about the blow that has been dealt the Jamaican economy by the recent closure of several of the island's bauxite and alumina facilities. The focus has been on the loss of foreign-exchange earnings, which has followed the slump in production, given that the bauxite industry has been the second-largest source of exports. But what is less well recognised is that the impact will be more widely felt by way of the downturn in economic activity across certain regions and sectors. Bauxite towns like Ewarton, May Pen, Mandeville, Santa Cruz and Junction in St Elizabeth have recently enjoyed a boost in business activity and jobs on a wave of investment in the industry. Over the 2002-2008 period, these towns and adjoining districts found themselves at the centre of huge capital spending on a scale not seen since the massive expansion in the 1950s and '60s. Some US$1.4 billion was invested in expansion and modernisation programmes during the period. Of this amount, about US$420-500 million or annual average of US$60-70 million was spent on local supplies and to employ local contractors, skilled workmen and construction labour across the parishes of St Catherine, Clarendon, Manchester, St Elizabeth, and Kingston. When account is taken of the multiplier effect of this spending, the income generated must have been substantially greater. An indication of the surge in construction activity was the increased consumption of cement in the mid-2000s when a range of civil works and expansion pro-jects were under way at Jamalco and Alpart simultaneously. These projects included road and rail infrastructure to open up new mining areas. In fact, the cement shortage in 2006, which was generally attributed to problems at Carib Cement's Rockfort plant, was due more to the higher demand coming from the bauxite-related construction activity and new hotel projects. Proof of this is that the increase in cement imports was three times the amount of the fall in production. Capital spending In terms of jobs, the significance of the capital spending can be judged by the fact that while 650 people were employed by Jamalco at its alumina plant and port, nearly 2,000 were engaged on the various projects. This comparison is only made to indicate the wider employment spread of the capital spending as against the plant operations, and not to downplay the longer-lasting effect of the permanent employment at the plant operations. Capital spending by the industry having now come to a virtual standstill, the affected towns and districts are going to suffer a further loss of US$70-80 million, or J$6.3 to 7.2 billion of income per annum on top of the losses arising from plant closures. As the losses take effect fully, people in these communities are bound to wonder about the prospects for recovery and be concerned about their survival. Are there simple indicators that they can use to follow developments in the industry? The most important indicator of the health of the bauxite industry is the strength of the demand for aluminium products. This is what ultimately drives the production and exports of bauxite and alumina. Aluminium products are used in the transportation sector (29 per cent), in housing and construction (20 per cent), consumer durables (9 per cent) and in packaging (19 per cent). These sectors account for nearly 80 per cent of aluminium consumption. Declines in these sectors lead inevitably to cuts in bauxite and alumina production. Devastated The transportation and housing and construction sectors have been devastated by the recession, especially in North America and Europe. Auto-giants General Motors and Chrysler basically went bankrupt as automobile sales in North America, which were running at over 17 million units per annum up to 2007, are now struggling to reach 10 million units. Sales have also fallen drastically in Europe. While China and India are rapidly catching up, strong growth in these markets cannot compensate for the debacle in Western markets. The housing industry, through sub-prime mortgages, was the trigger for the financial crisis that fuelled the recession. In the advanced countries, the industry suffered its worst year for decades in 2008, and continues to experience falling prices and weak housing starts, and building permits are still declining. The rising foreclosure rate in the United States is weighing heavily on new-home construction. Recovery of the industry will take years. A third indicator is the level inventories of aluminium held by producers and metal exchanges, which are part of the trading system that connects producers and consumers. As aluminium consumption collapsed last year, inventories rose to astronomical levels before producers carried out production cuts at smelters, and in turn, at alumina refineries worldwide. These inventories remain high, but the production cuts have halted the rapid build-up. This is one of the factors behind the 50 per cent increase in aluminium prices since February. With prices regaining ground and the adoption by the companies of stringent cost-saving measures, we are beginning to see signs of improved balance sheets. But recovery in demand and production of aluminium, alumina and bauxite will depend on the pace of the turnaround in global economic activity and, in the short- term, on the impact of stimulus measures in the leading economies. China, the leading player in the industry, was the first to make production cuts and is showing signs of a pick-up in consumption. This will be a decisive influence.