Letter from... - Trade & Forfaiting Review

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posted 26 Jun 2009 in Volume 12 Issue 8

Letter from…

Duane Wright looks at how the global recession has affected commodities in Jamaica and across the Caribbean.

When the newspapers write about the impact of the recession on world trade, they normally focus on Europe, China, the US and commodity producing nations. The most far-sighted, perhaps, will take a sideways glance at Africa and how a fall in demand for certain commodities has affected certain economies. But what about the islands and nations of the Caribbean?

Well, here it is little different. With metals hard hit by the downturn, it is little surprise to see Jamaica suffering as a result. The world’s second largest exporter of bauxite, the raw material used to make aluminium, four of the five alumina operations in Jamaica have either been shut down indefinitely or are idling, with the workers either laid off or idling, too.

The only fully operating plant (JAMALCO) is run by aluminium giant Alcoa, and is widely regarded as the most efficient on the island. It, however, has had to scale back a $1.2bn expansion programme designed to double output.

West Indies Alumina (WINDALCO), whose majority shareholder is Oleg Deripaska’s United Company Rusal, has suspended bauxite mining as it temporarily shutters the company’s operations, while there is talk of reviving the 1994 memorandum of understanding in which the major aluminium producers of the time cutback production in a concerted attempt to lift prices.

On the coffee front, increasing input costs and hurricanes in the last few years have been hurting farmers in Jamaica, so output has been falling – a common problem throughout softs, especially as the credit crunch has restricted access to capital.

However, there is heavy government involvement through the Coffee Industries Board and the main exporter companies Wallenford Coffee and Mavis Bank Coffee factory that purchase from a few thousand small farmers. The Ghana Cocoa Board (Cocobod) has found a way to make it work in Ghana and our Blue Mountain range of coffee does command a premium on the world market, but I’m not sure the level of output quite compares with such producers as Brazil, Vietnam and Indonesia.

Would the big banks therefore be interested in such a relatively small deal? With the main offtake coming from Japan (which scoops up about 40% of total output), the UK and the USA, and a government push to recruit 3,000 new farmers under a USAID-funded programme, there could be room for opportunity in the future.

Sugar rush
The Jamaican government is also seeking bids for a takeover of sugar operations after a proposed deal with a Brazilian buyer fell through. The industry needs major retooling and, no doubt, will need additional financing, but at the moment no deal has been agreed.

The government has continued funding of this year’s harvest, but any bidder will be hard-pressed to raise the finance, as evidenced by the last deal that fell through. Already there are partnerships between Petrojam (the state-owned energy company) and Jamaica Broilers with Brazilian ethanol producers, so the general feeling is that a partnership with a Brazilian entity is likely.

From what I have heard from market contacts, everyone is focusing their efforts on top-tier clients and restructuring deals. Coming out of the Global Commodities Finance Conference in Geneva at the beginning of June, there are still conflicting views on whether we are starting to ‘turn the corner’.

The most exciting prospect for the region, perhaps, is the prospect of President Obama pushing for a change in US-Cuba relations and the possible lifting or easing of the US trade embargo on Cuba, one of the biggest islands in the Caribbean. That may open up opportunities in sugar and nickel, but the big talk is around oil.

In a number of reports late last year, Cuba’s state-owned oil company, Cubapetroleo, estimated reserves at some 20 billion barrels, which would put Cuba in a top-20 position in the world for oil reserves. However, these estimates have not been proven and there are many sceptics questioning the estimate. Although Hugo Chavez is Cuba’s main ally, with Venezuela not having the deep-sea oil drilling experience, Spain’s Repsol and Brazil’s Petrobras – as well as the US majors – could be expected to play a leading role in the development of the Cuban oil industry.

That’s if Obama follows through, of course, or is not derailed by Congress.

Duane Wright is a corporate banker at a major UK bank in London. He can be contacted by e-mailing dawrights@hotmail.com