Investments during meltdown

Dec 01, 2008 Editorial

One of the sad features in our deeply politically divided policy is the spin imparted even on developments that impact on the overall development of the country.

While we accept that it is the duty of the opposition to critique the Government’s pronouncements, surely, all Guyanese ought to maintain as their baseline the promotion of the national good.

We were somewhat taken aback by the widened interpretation given by some to the remarks of the President on the relative insulation of our banks and other financial institutions from the financial meltdown racing through the developed economies.

At no time did the President say or imply that the Guyanese economy, as a whole, would be immune to the ripples from that catastrophe.

As a matter of fact, very early in the day, the President noted that remittances and investments into Guyana would surely be negatively impacted and that the Government would have to tailor its policies to ensure that Guyana does not suffer inordinately.

And it is in this light that we must evaluate some recent announcements on a number of major investments that are plugged for Guyana. At the top of the list is the projected investment by Bosai in the bauxite industry.

Many reports did not elaborate on the fact that the “Heads of Agreement” that was signed is simply a “non-binding document outlining the main issues relevant to a tentative partnership agreement.” That is as far as we have gone: Bosai can now conduct a feasibility study for the project.

Secondly, there was some confusion as to what the project is all about: an alumina plant is contemplated, not an aluminium smelter. An alumina plant processes metal grade bauxite (the Bayer process) using, among other things, caustic soda and starch to precipitate alumina or aluminium oxide.

Alumina can later be smelted into the metal aluminium in a process that requires extraordinary quantities of electricity. Guyana already had an alumina plant in operation and was an exporter of the material.
To his credit, the Bosai spokesman pointed out the difficult financial climate in which the project is being considered.

The China Aluminium Network reported, “The project was planned to start next year, (but) is likely to be postponed due to the global financial crisis.” Demand for bauxite has dropped in the last few months, and Chairman Paul Skinner, of the mega bauxite company Rio Tinto, sees the downturn in the aluminium industry continuing into 2009.

In fact, rival BHP Billiton abandoned its $66 billion takeover bid for Rio Tinto (which had recently swallowed Alcan), blaming sliding metals prices and the threat of global recession for scuppering the mega-merger.
Against this background, we have to accept that incentives will have to be offered if a discouraging tight credit environment (meaning higher interest costs) is to be overcome.

The Bosai spokesman also noted that if cheap hydro-power is available in Guyana, and the alumina operation production was successful, it may be feasible to go ahead with an aluminium smelter.

He was alluding, of course, to another mega-investment that may be affected by the tightening of global credit – the Amalia Falls Hydro-electric project that was slated to deliver 154 MWh to the national grid.
With petroleum about to hit US$50, the investors in that project will surely be crunching the numbers once again before they commit US$400 million.

Then there have been at least eleven serious projects presented to the Government on ethanol. The financial crisis, as well as the precipitous drop in the price of the petroleum that it was supposed to replace, has also forced a re-evaluation in this area.

Several huge operators in both the US and Brazil – the major producers of ethanol – have filed for bankruptcies precipitated by the global credit crunch.

What we want to reiterate is that very few countries can control exogenous factors that act against their investment goals – and there is precious little that we can do about this elephant of an exogenous factor that is roiling the world.

What we can do is to prepare ourselves – as for instance utilising the grants for building our capacity to absorb ethanol investments – for the investments once the meltdown is brought under control.

We have to be positive about the investments, since the long term fundamentals on demand for aluminium, power and ethanol are solid. Let us stop this self-flagellation.

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