JAMAICA: IMPLICATIONS OF THE TAX INCREASE ON BAUXITE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900030119-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 20, 2016
• Document Release Date: March 3, 2006
• Sequence Number: 119
• Publication Date: September 30, 1974
• Content Type: REPORT

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Jamaica: Implications ofr the Tax Increase on Bauxite
KEY JUDGEMENTS
Jamaica has levied stiff new taxes on the six vertically
integrated aluminum companies operating on the island. The
tax, which is tied to the posted price of aluminum, will
increase Jamiaca's bauxite revenues from $25 million to about
$165 million this year.
Company Reaction
The aluminum companies are heavily dependent on Jamaica
as a supply source and have little choice but to accept its
demands. Financially, the companies have no pressing reason
to resist the new tax. Aluminu_*n demand is strong and the
companies will 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 will allow
the government to ease restrictive measures that have slowed
economic growth.
Oji file DOI release instructions apply.
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M-trket Impact
Jamaica's action will provoke demands for higher taxes
by other bauxite producing countries. Four,,Ctribbean producers
have already initiated or threaten. similar action. The
al-iminum companies probably will turn to countries that
curren+-.ly 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.
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Jamaica's Tax Action
1. Jamaica's tax action followed two months of incon-
clusive negotiations with the aluminum comp4nies. These were
initiated by the government in !-larch 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' Jana.ican subsidiaries, and
reversion to the state of une:~ploited 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. -
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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. The legislation also established minimum bauxite
p:coduction rates for each company that total 14 million tons
for 1974. This is about 10% above output in 1973 but well
below 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 mill.Lon,
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
the aluminum companies have little
alternative but to go along with 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,
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but a decision could 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 mere 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 $1.2 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 magnitude. Strong demand for primary
aluminum has boosted US capacity utilization this year to
99.6% from 94% in 1973 and a critical metal shortage 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
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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 companies -- 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 output. To develop
--- -- ~- r~o~~~ . such countries 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 17% of total company alumina refining capacity is located
in Jamaica, the companies would have great difficulty under
such circumstances in utilizing 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.
7. 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 investments to expro-
priation. US company holdings alone are valued at about
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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 royalty :avenues. 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 estiriated 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 in a much better
position to meet a $100 million jump in oil import costs
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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
use part of the nex tax receipts to finance labor-intensive
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
30% 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.
o The Dominican Republic opened contract re-
negotiation talks with an Alcoa subsidiary
in July. It has rejected a company offer
to double tax and royalty payments and
introduced legislation to unilaterally
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implement the Jamaican tax formula.
? Surinam soon plans.
contract renegotiation
talks with an Alcoa .3ubsidiary.
e Haiti has informed Reynolds officials that it
intends to open contract renegotiation talks
no later than this December.
11. Australia, the knrld.1s.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 countires -- Guinea, Sierra
Leone, and Yugoslavia -- recently joined Jamaica, Australia,
Guyana ..nd S~2rinam in establishing the International Bauxite
Association (IBA). Its main goal is increasing earnings
from bauxite through cooperative action. The IBA's charter
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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 1 and Table 4).
Including the Dominican Republic, which has applied for
membership in the IBA, the scare-of world production rises to
77%.
13. There are few alternative bauxite 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 insists
that exports be at or close to world prices, would probably
institute the 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
and Indonesia for future bauxite needs. These two countries
have large reserves and are riot r,iajor producers at present.
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The bauxite boom beginning in the Amazon region could maze
Brazil a major producer within ten years. A dozen projects
are in the early stages of discussicn and one project already
underway -- Nineracao Rio De Norte -- is scheduled to come
on stream in 1977 with an initial production of 3.4 million
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 10% 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 time, it probably will exploit any success the
association may have in raising prices.
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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 the
pilot plant'will provide necessary data to begin construction
of a commercial plant with a capacity of 500,000 tons per
year by mid-1975 that would cone on stream in 1978.
Pechiney -- A French-owned aluminum company -- claims
to have a non-bauxite alumina process that is commerically
competitive with bauxite. The process is now only entering
the pilot-plant test stage, however. Even it it proves
successful the process will not be ready for commercial
application before 1980.
18. Cost estimates for producing alumina from non-
bauxite clays by the most promisi;,g method indicate that
these clays would be competitive if bauxite costs reach
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$25-$30 per ton. At this price, the United States would be
able to cover all domestic aluminum requirements from
_J.ndigenous 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 $110,000
per ton of daily capacity compared with $66,000 for a plant
using bauxite (see Table 5). At least $1 billion would be
needed just to construct plants to handle current alumina
consumption in the United States.
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Bauxite Holdings of the Six Aluminum Companies
Operatirg in Jamaica
Total bauxite
production capacity
"Thousand Long Tons)
.
Aluminum Company of
America
Reynolds Metals Company
Kaiser Aluminum and
Chemical Corp..
5,500
Jamaica
55
Guinea
14
Malaysia
1'
Other
20
lnn
12,050
Surinam
3d
Australia
23
Dominican Republic
12
Jamaica
Other
I1
to
100
7,850
Jamaica
56
Guyana
17
United States
i5
Haiti
10
Other
2
100
11,650
Jamiaca
58
Australia
40
Other
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Bauxite Holdings of the Six Aluminum Companies
Operating in Jamaica
Location of Capacity
Company
A=,aconda Company
Total bauxite
production capacity Percent of bauxite
(Thousand Long Tons) Country capacity
900 Jamaica
Revere Copper and Brass Inc. 500 Jamaica
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 Jamaica: Balance of Payments
Exports (fob)
of which: bauxite and alumina
Imports (fob)
Trade Balance
Tourism (net)
Other current transactions
CURRENT ACCOUNT BALANCE
Direct Investment (net)
Other capital and errors
and ommissions
CAPITAL ACCOUNT BALANCE
PAYMENTS BALANCE
Million US$
1970
1971
1972
1973
342.1
343.3
377.6
396.1
225.1
232.7
220.2
207.2
449.0
474.1
528.6
574.8
-106.9
-130.8
-151.0
-178.7
80.0
92.7
114.1
108.3
-126.0
-133.6
-159.7
-177.0
-152.9
-171.7
-196.6
-247.4
161.4
175.5
97.9
75.5
12.7
44.3
43.3
149.1
174.1
219.8
141.2
224.6
21.2
48.14.
-55.4.
-22.8
.25
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Source of United States Bauxite
and Alumina Supplies*
(metal content)
Orrin
Domestic
Jamaica
Australia
Surinam
Guyana
Dominican Republic
Haiti
Other
Total
Percent
8.7.
39.2
20.6
16.7
Includes imports of US Virgin Islands
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Free World Bauxite Reserves
(Million Long Tons)
Country Reserves
International Bauxite Association
10,180
Australia
4,700
Guinea
3,500
Jamaica
1., U00
Surinam
500
Yugoslavia
250
Guyana
200
Sierra Leone
30
Brazil
2,000
Indonesia
80*
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 deoosit's size is
being withheld by Indonesia and A loca
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 Clay
Nitric acid-pressure
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Summary of Alumina Process Cost Estimates*
Operating cost Fixed capital cost
(dollar/ton of (dollar/ton of
Raw material and process alumina) - daily capacity)
leaching
Anorthr)site
Lime-soda
grinding
Bauxite
Bayer
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$93
$110,100
sinter, wet
opition
$111
$100,400
$88
$66,000
* Costs are for a plant of 1,000 tons/day capacity.
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CENTRAL INTELLIGENCE AGENCY
WASHINGTON, D.C. 20505
5-6-s
CIA No. 8288
30 September 1974
MEMORANDUM FOR:. Mr.
Office of Investment Affairs
Department of State
SUBJECT Jamaica: Implications of the Tax
Increase on Bauxite
Attached is'a copy of the paper on bauxite that
promised you. He originally prepared it
for another purpose. We are also sending copies to
several other interested persons around town.
? North America/Caribbean Branch
Office of Economic Rejearch
Attachment:
As stated
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Distribution:
Orig. and
1 - Addressee
1 -
D/OER
1 -
SA/ER
1 -
St/P
1 -
D/I
1 -
NIO/LA
1 -
Lawrence Rosen (CIEP)
1 -
2
Janice Lyon (State).
John Stamper (Bureau of
Mines)
I/NA
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