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25X41 Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 25X1 : ae | 7 | CIA OER/S-P 6512-74 : Jamaica: Implications of the Tax Increase on Bauxite KEY JUDGEMENTS Jamaica has levied stiff new taxes On the £1x vertically integrated aluminum companies operating on the island. The : tax, which is tied to the posted price of Stamens will increase Jamiaca's bauxite revenues from $25 million to about $165 million this year. : 7 Company Reaction The aluminum companies are heavily dependent on Jamaica eae as a supply source and have little choice but to accept its demands. Pinancially, the companies have no pressing reason to resist the new tax. Aluminum demand 1s strong and the companies wi11 have no trouble passing through increased costs of bauxite. Jamaican Benefits New tax revenues will alleviate the balance-of£-payments squeeze that nas recently plagued the economy and wxl1l allow the government to ease restrictive measures that have slowed | | eng economic growth. ki bg apaN | | ONLY ‘ On file DOI release instructions apply. - = _ Approved For Release"2007708/007 GIA RDPBSTO0S/SROOLS000R01 19-4, enn eee ea TE Te OTT Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 Market Impact Jamaica's action will provoxe demands for nigher taxes eke by other bauxite producing countries. Four, Caribbean producers have already initiated or threaten similar action. The aluminum companies probabdly will turn to countries that : currentiy are not major producers to develop new supply sources ove: the next several years. Even these countries are expected to follow Jamaica's example, however, once they become exporters. Bauxite Substitutes Substitutes set a long-term ceiling on bauxite prices but are not likely to become important sources of aluminum during the next decade. oe ae eee ee EE LT SE CTY TT = cae nner te TTT STMT Sema Me STITT ITaTT Sar oPEERCERL REREL EEE SEEREEE REE eREReeeNmies Coenen or ce ORR TET IN a ee oe 7 RE TTR ERE NPE TTT TPS TTT aR EP TC ETRE TTR FT RTO nor : \ ren : sa " ead ct Ey ey BEE aide as a Peasy jccain dna inet a Teint Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 DISCUSSION Jamaica's Tax Action 1. Jamaica's tax action followed two months of incon- clusive negotiations with the aluminum companies. These were initiated by the government in March to renegotiate company contracts that still have another ten to twenty years to run. Kingston demanded sharply increased bauxite revenues, equity participation in the companies' Janaican subsidiaries, and reversion to the state of unexploited company bauxite reserves in excess of 25 years' needs. The revenue demands were strongly resisted by the companies' who made only small counter offers. Kingston broke off the talks and in June enacted legislation unilaterally imposing the revenue increase. Consideration of the remaining issues was postponed until this fall. 2. The action imposed a 55 cents per ton* royalty and an initial $11.69 per ton tax on bauxite production retroactive to 1 January 1974, compared with a previous combined royalty and tax payment of $2 per ton. .A novel feature is calculation of the tax as a share (7.5%) of the market value of the average aluminum content of Jamaican bauxite as determined from US posted prices for primary aluminum ingot. This is intended * Tonnage figures in this paper refer to long tons of 2,460 pounds. ‘ : - ~ Approved For F elease 2007/03/09 : CIA-RDP85T00875R001900030119-4 = 1 to ensure that Jamaica will benefit from rising aluminum prices. At the same time, the legislation sets a $11.16 per ton floor under the tax payment to protect Jamaica from aluminum price declines. With the 1 August rise in the US posted aluminum price from 33% cents a pound to 36 cents, ' combined tax and royalty payments now amount to $13.11 per ton. If the US posted price increases to 40 cents by year- end, as expected, payments will rise to $14.50 per ton. 3. he legislation also established minimum bauxite production rates for each company that total 14 million tons for 1974. This is about 10% above output in 1973 but well pelow the 15.4 million tons the companies originally planned to produce this year. At quota output levels, company tax and royalty payments in 1974 will total $165-$175 million, depending on the timing and magnitude of increases in US aluminum prices later in the year. By comparison, company tax and royalty payments in 1973 amounted,to about $25 million. Company Situations and Probable Short-Term Reactions 4. In the short term, the aluminum companies have little alternative but to go along witha Jamaica's demands. Three -- Alcoa, Kaiser, and Reynolds -- have made formal request for arbitration of the dispute to the World Bank's new Inter- national Center for the Settlement of Investment Disputes, sees et AORLARM eH AOI NPE # een ne: . _ Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 ' ee dese ee cay hd. Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 - bit a decdsion eeuia take from one to three years to obtain. Meanwhile, the companies have made their first two 1974 quarterly tax payments, though under protest. They undoubtedly - will limit their Jamaican production to the quota levels this year, while attempting to expand output elsewhere. 5. The companies have little pressing financial reason for offering more than token resistance to the tax increase. To be sure, the new tax has about doubled the cost of Jamaican bauxite to US smelters -- from $12 per ton to $23.11 as of 1 August. But bauxite represents only about 10% of aluminum costs, and the increase therefore has added only about 3 cents a pound to US aluminum costs. The companies should have no difficulty in passing on a cost increase of this oenenae. Strong demand for primary aluminum has boosted US capacity utilization this year to 99.6% from 94% in 1973 and a critical metal snortage is a strong possibility during 1975-76. Moreover, prices for competing materials -- copper, steel, and plastics -- have risen substantially and are in short supply. The 1 August aluminum price increase undoubtedly already reflects in part the higher cost of Jamaican bauxite. 6. The companies would have great difficulty in the short run in shifting a significant part of their Jamaican co Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 t { | j H i | : SL nee ar net ce ET RTE SOE tte Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 . bauxite and alumina operations to alternative supply sources, The Jamaican share of the combined bauxite Capacity of the Six companies amounts to 42%, and the entire Capacity of the two smaller colupanies -- Anaconda and Revere ~- is located there (see Table 1). According to US Bureau of Mines estimates, it would take the companies six months to a year to expand existing operations elsewhere enough to replace as little as one-fourth of Jamaican supplies and at least two years to replace all Jamaican Oovtput. To develop recently discovered deposits in suendenbneedee as Brazil and Indonesia would take much longer. The difficulty and cost of expanding alumina refining and infrastructure are the main constraints on a rapid shift to other supply sources. Since about 178 of total company alumina refining Capacity is located in Jamaica, the companies would have great difficulty undex such circumstances in deaniaing the large amount of bauxite now in the us strategic stockpile -- at 14 million tons, equal to about 18 month's us supply from Jamaica. qe The companies also would be highly reluctant to abandon all or even a significant share of their $850 million investment stake in Jamaica. Even though Jamaica has made no threats, a Substantial decline in company operations could also expose their iavéstmente to expro- priation. us company holdings alone are valued at about Approved For Release APEreved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 7 $660 million, of which only $465 million is covered by OPIC political risk insurance. Impact on the Jamaican Economy . 8. Jamaica will benefit greatly from new bauxite tax and eeyarey revenues. The §165 million that the government expects to receive in 1974 will eliminate the balance of payments squeeze that has plagued the economy since 1971 when substantial inflows of private capital into the bauxite/alumina industry fell off sharply (see Table 2). Because of balance of payments constraints and measures taken to conserve foreign exchange reserves ~~ a restrictive monetary policy, devaluation of the Jamaican dollar and import restrictions -- real growth of GDP in 1973 slipped to an estimated 3% compared with the long-term average of 5.2% registered in 1960-72. Even with these measures by the end of 1973 foreign exchange reserves had dropped to $110 million, equal to less than two month's imports. 9. Improved balance of payments prospects have already allowed the government to ease some of its restrictive measures. Kingston recently relaxed import restrictions, for example. This action should help slow the accelerating rise in consumer prices which climbed et an annual rate of 30% in the first quarter of 1974. Jamaica also will be 1n a much better position to meet a $100 million jump in oil import costs -5- Approved For Rel 28 5X1 this year because of higher prices. The new revenues should allow the government to make some modest headway toward its main economic objective of reducing the unemployment rate which is estimated at 20%-25%. Kingston iS expected to t 1 use part of the nex tax receipts to finance labor-intensive ae development projects. Some of the new revenues | participation may also be used to buy equity/” © in domestic bauxite operations and to finance Jamaica's share of a proposed joint-venture aluminum smelter with Guyana and Trinidad. Implications for the World Bauxite Market 10. Coming at a time when many bauxite exporting countries are suffering balance~of-payments strains caused by high oil prices, Jamaica's tax moves threaten to spur other bauxite exporters to take similar action. Thus far, four other Caribbean exporters, accounting for an additional 303 of US supplies, have initiated or threaten action to increase revenues (see Table 3): ; o Guyana initiated contract renegotiations with | a Reynolds' subsidiary in July but apparently | will legislate a tax increase along the lines of the Jamaican formula. © The Pominican Republic opened contract re- negotiation talks with an Alcoa subsidiary to double tax and royalty payments and introduced legislation to unilatcrally ; 1 | in July. It has rejected a company offer : t Steen mtrA we or eee emirate oe Guyana Approved For Rel implement the Jamaican tax formula. Surinam soon plans , contract renegotiation talks with an Alcoa subsidiary. Haiti has informed Reynolds officials that it intends to open contract renegotiation talks no later than this December. 11. Australia, the yorla's largest bauxite producer and supplier of about 20% of US bauxite and alumina needs, may also follow Jamaica's lead. Canberra will be under increasing domestic political pressure to narrow the bauxite revenue gap between Australia and Jamaica. The Whitlam government recently expressed dissatisfaction with its present share of bauxite revenues, and the Queensland provincial government has already opened contract renegotiations with a Kaiser subsidiary to raise royalties. 12. Other bauxite exporters also probably will raise taxes and royalties. Three countixes -— Guinea, Sierra Leone, and Yugoslavia -~ recently joined Jamaica, Austraila, nd Surinam in establishing the International Bauxite Association (IBA). Its main goal is increasing carnings from bauxite through cooperative action. The IBA's charter ase 2007/03/09 : CIA-RDP85T00875R00 900030119-4 my a i a acai A pproved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 apparently prohibits restrictions on production to achieve this goal but the countries probably have enough economic leverage if they stick together to boost world bauxite prices to the Jamaican level. These seven countries account for 75% of Free World bauxite production and 68% of commer™ cially exploitable reserves (see Figure l and Table 4)- Including the Dominican Republic, which nas applied for membership in the IBA, tme snare of world production rises to 771%. 13. There are few alternative pauxite sources to which the aluminum companies can turn. Only the United States, France, Greece, and India are important non-IBA producers. Greece is the only country that has reserves large enough to warrant capital outlays of approximately $15 per ton for each new unit of production capacity. athens, which unsists that exports be at or close to world prices, would probably institute tne Jamaican formula and at present no North American companies have plans to enter into bauxite pro- duction there. 14. Aluminum companies are Very interested in Brazil These two countries and Indonesia for future pauxite needs. have large reserves and are not major producers at present. Approved For.Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 i AS PT IO I oX1 Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 The bauxite boom beginning in the Amazon region could make Brazil a major producer within ten years. A dozen projects are in the early stages of discussicn and one project already underway -- Mineracao Rio De Norte -- is scheduled to oid on stream in 1977 with an initial production of 3.4 aeiisoh tons of bauxite annually. Production from this project is reportedly committed for the next 20 years. A US-owned company has a 5% equity interest in the project and will receive 108 of annual output. Exploiting Brazil's extensive reserves has several drawbacks, however. Production costs are high because most of the deposits are inaccessible and require extensive development of infrastructure. Moreover, there are indications that Brazil contemplates action similar to Jamaica's once it becomes an exporter. 15. The international aluminum companies confront much the same situation in Indonesia. The state mining enterprise -- Aneka Tambang -- is likely to retain majority control of new bauxite mining ventures and negotiate stiff financial terms. Although Indonesia apparently prefers not to join the IBA at this. tine, it probably will exploit any success the association may have in raising prices. Appro Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 20X1 Role of Bauxite Substitutes 16. The availability of bauxite substitutes sets a long- term ceiling on bauxite prices. As the Jamaican tax formula becomes standard, world prices will reach $20-$25 per ton. The higher cost to consumers will accelerate research aimed at breaking the bauxite-alumina chain. Four small pilot plants in the United States currently are testing methods of producing alumina fron non-bauxite materials. One of these -- a joint venture of Earth Sciences Inc., National Steel Cor- poration and Southwire Company —— is testing a process to recover alumina from alunite. — The participants hope tne pilot plant’ will provide necessary data to begin construction of a commercial plant with a capacity of 50u,0U0 tons per year by mid-1975 that would cone on stream in 1978. °27. Pechiney ~- A French-owned aluminum company —~ claims to have a non-bauxite alumina process that is commerically competitive with bauxite. The process is now anly entering the pilot-plant test stage, nowever. Even it it proves - i \ t | | } i successful tne process will not be ready for commercial application before 1980. 18. Cost estimates for producing alumina from non- bauxite clays by the most promisiig method indicate that these clays would be competitive if bauxite costs reach 1 1 ee Et RE Ee OTT a 25xt Approved For Release 5X1 ° PT aaa $25-$30 per ton. At this price, the United States would be able to cover all domestic aluminum requirements from indigenous clays and other aluminum-bearing materials such as anorthosite and alunite. Erecting facilities to process non-bauxite materials would be very expensive. An alumina plant handling non-bauxite clay costs approximately $110,00U per ton of daily capacity compared with $66,000 for a plant using bauxite (see Table 5). At least $1 billion would be needed just to construct plants to handle current alumina consumption in the United States. : CIA-RDP85T00875R001900030119-4 “ROPES aes Table L Total bauxite _production capacity Ufhousand Long Tons) Company ; . “i Alcan Aluminum Lid. 5,500 “| el on a Aluminum Company of 12,050 : America i . 2] | Reynolds Metals Company 7,850 ; Kaiser Aluminum and 11,650 Chemical Corp... i a 29's 760875R001900030119-4 oo DBL Bauxite Holdings of the Six Aluminum Companies Operatirg in Jamaica : ers Location of Capacity Country Jamaica Guinea Malaysia ‘Other Surinam Australia Dominican Republic Jamaica Other Jamaica Guyana United States Haiti Other Janiaca Australia Other Pe 8s | | 25X1 | ; Approved For Releas 030119-4 Percent of bauxite capacity he UT Non io oa oO Ah ne tor Table l (Cont.) Bauxite Holdings of the Six Aluminum Companies Operating in Jamaica Total bauxite production capacity Company . ; (Thousand Long Tons) Auaconda Company 900 Revere Copper and Brass Inc. 500 - 13 =- Location of Capacity 7 Percent of bauxite Po SOHN GRY as So es Ce a as : Jamaica 10u Jamaica 100 : 4 i 3 25X1 Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 = ~ <0 Sa a Pi CRU GN aa CCS El ale UR a a Ta T Pan re ODED Tv % 7 ae Bae ici ic RC Eh cas iy ‘ . Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 Table 2 Jamaica: Balance of Payments Millaon uSS$ 1970, 1972 y72_ 1973 Exports (fob) 342.1 343.3 377.6 396.1 of which: bauxite and alumina 225.1 232.7 220.2 207.2 Imports (fob) 449.0 474.1 528.6 574.8 Trade Balance -106.9 -130.8 ~151.0 -178.7 Tourism (net) 80.0 92.7 114.1 108.3 Other current transactions 126.0 -133.6 =159).7 -~177.0 CURRENT ACCOUNT BALANCE -152.9 -171.7 -196.6 —-247.4 Direct Investment (net) 161.4 175.5 97.9 75.5 Other capital and errors | and ommissions ' 12.7 44.3 43.3 149.2 CAPITAL ACCOUNT BALANCE 174.1 219.8 141.2 224.6 PAYMENTS BALANCE | 21.2 48.1 -55.4 -22.8 ; I. I: hi | Cisdz ia _ Approved For Release. 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 Table 3- Source of United States Bauxite and Alumina Supplies* (metal content) Origin Percent Domestic 8.7. Jamaica 39.2 Australia 20.6 Surinam . . 16.7 Guyana . 6.7 Dominican Republic 4.5 Haiti 1.4 Other 2.2 ; Total 100.0 a A Scalp se ee * Ineluaes imports of US Virgin Islands . Approved For Release 2007/03/09 : CIA-RDP8ST00875R001900030119-4 t Approved For Release 2007/03/09 : CIA-RDP85T00875R0019000301 19-4 Table 4 Free World Bauxite Reserves (Million Long Tons) Country Reserves International Bauxite Association | 10,180 Australia 4,700 Guinea 3,500 Jamaica 1,, 000 Surinam 500 Yugoslavia 250 Guyana ; 200 Sierra Leone 30 Brazil 2,000 Indonesia Bu* Greece 700 France 6U United States "40 Other 1,820 Total 14,880 * Does not include a large bauxite deposit recently discovered by Alcoa. Information on the deposit's size is 5 withheld = Indonesia and Aloca poe ee ae ....Approved For R please 2007/03/09 : CIA-RDP85T00875R001900030119-4 . | Table 5 Summary: of Alumina Process Cost Estimates* -g : . : Operating cost Fixed capital cost 7 ; (dollar/ton of ' (dollar/ton of | ‘4 Raw material and process alumina) daily capacity) “8 TR A NR _ .- yi a Clay Nitric acid-pressure leaching . §93 : $110,100 Anorthnsite Lime-soda sinter, wet aay grinding opition . $111 $100,400 Bauxite Bayer $88 $66,000 * Costs are for a plant of 1,000 tons/day capacity. ClA-RDP85T00875R001900030119-4 pce a aN a we en fe ee "Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 Pbroyed For Refease 2007/03/08 F poe ts fas na : ‘ f Fa Ee OR, a ira aa ey oer sew fee eee melee eee ee ee eee ! Wivmee gee ont bate fede a mete dtd nde H a : t t a { & beam ‘ ~ 2 i - % f 2 i ES poe at aera ss lingat suiss ay are “ oe eur nik ts uae tui naa Wie ats wad ty Taly, Rcamiel . _ ean : a A a a a oa Da ac wf : : : i ist Bh SA le a A a as ae th a an LSE TRE LO OTR On Lg NPB TER i , me EAE TD ae we NS Approved : 5 0019000301 19-4 = ae G S723 CENTRAL INTELLIGENCE AGENCY WASHINGTON, D.C, 20505 CIA No. 8288 30 September 1974 MEMORANDUM FOR: - Mr. David stebbing _ Office of Investment Affairs Department of State Jamaica: Implications of the Tax SUBJECT : Increase on Bauxite |__| Promised you. He originally prepared it We are also sending copies to Attached is a copy of the paper on bauxite that for another purpose. several other interested persons around town. Le - North America/Caribbean Branch Office of Economic Research Attachment: As stated "Approved For Rélez " N. eet ec ties sc neon cs Rae Approved For Release 2007/03/09 : CIA-RDP85T00875R001900030119-4 | | { { Distribution: Orig. and 1 - Addressee 1 - D/OER | ; l- SA/ER_. _ 1 - St/P i 1 - D/I 1 - NIO/LA 1 - Lawrence Rosen (CIEP) 1 - Janice Lyon (State) ae i - John Stamper (Bureau of Mines) | (2 - I/NA ; OER/D/I/NA |