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FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0802
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1784
RUEHMD/AMEMBASSY MADRID 2040
RUEHFR/AMEMBASSY PARIS 1388
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC

C O N F I D E N T I A L BUENOS AIRES 000496 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 04/16/2018 
TAGS: ECON EINV EIND ETRD AR VE BR MX
SUBJECT: ARGENTINE GOVERNMENT TAKEN BY SURPRISE AS CHAVEZ 
NATIONALIZES ARGENTINE STEEL MILL IN VENEZUELA 
 
REF: A. CARACAS 532 
 
     ¶B. 07 CARACAS 1518 
     ¶C. BUENOS AIRES 439 
 
Classified By: Economic Officer Ian Sheridan, reasons 1.4, b. and d. 
 
¶1. (C) SUMMARY. The Government of Venezuela's (GOV) 
announcement that it would nationalize Venezuela's largest 
steelmaker, Ternium Sidor, majority-owned by Argentine 
interests, has rattled local markets and complicated the 
relationship between Argentine President Cristina Fernandez 
de Kirchner (CFK) and Venezuelan President Hugo Chavez.  Top 
GOA officials told us that Chavez made the move without 
consulting CFK or even informing the GOA, and reportedly out 
of "solidarity" with Sidor's workers.  Local press reports 
indicate that he was also motivated by charges that he has 
not delivered on promises of new low-cost housing and that 
the steel industry has not provided enough of its product to 
the domestic market.  The Argentine media reported that 
Chavez ignored entreaties from CFK and Sidor's majority 
owner, Argentine steelmaker Techint, seeking a 
reconsideration of his action.  Argentine business and union 
leaders have come out strongly against the action, claiming 
that it threatens Mercosur integration.  Some local media 
have taken CFK to task for Chavez's "slap" against a supposed 
friend and others have questioned Venezuela's still-pending 
admission into Mercosur.  Indemnification details remain to 
be worked out, but local media estimates the value of 
Techint's holdings in Sidor at US$2.5 - 3 billion.  The deal 
appears to be another setback for the still-new CFK 
administration, and has caused local industry and media to 
question the value of the "brotherly" relationship with the 
controversial Chavez.  END SUMMARY. 
 
----------------------------------------- 
Chavez nationalizes Argentine-owned Sidor 
----------------------------------------- 
 
¶2. (C) The GOV's decision to nationalize Venezuela's largest 
steelmaker, Ternium Sidor, majority-owned by Argentine and 
Brazilian interests, has rattled local markets and put 
President Cristina Fernandez de Kirchner (CFK) in a bind, 
given her ties to Chavez and her obligation to protect 
Argentine investments.  Senior GoA officials, in private 
conversations with the Ambassador and Assistant Secretary 
Shannon (septels), reported that Venezuelan President Hugo 
Chavez made this move in the middle of the night without any 
prior consultation, nor did they call the GOA to give them a 
heads up.  The GoV's public rationale claimed the 
nationalization was declared out of "solidarity" with Sidor's 
workers, after a meeting where the GOV claimed that the 
"arrogant" and "inhumane" company showed more concern for its 
plant machinery than its workers. 
 
¶3. (SBU) Chavez first threatened to seize Sidor in August 
2007, but intervention by then-President Nestor Kirchner and 
Techint executives helped to bring about a truce (that 
reportedly also involved GOV demands that Sidor sell more 
steel to the local market and increase the price it paid for 
iron from a GOV-owned iron mine).  Media reports noted that 
CFK also spoke on this matter with Chavez during her visit to 
Caracas in March 2008. 
 
¶4. (U) The media has reported this action as Chavez's first 
nationalization of an Argentine company, and the first in 
Venezuela involving the assets of such a closely tied 
country.  It also occurred during the run-up to Venezuelan 
gubernatorial elections, and shortly after the April 3 
announcement of the nationalization of Venezuela's largest 
cement producers: Mexico's Cemex, France's Lafarge, and 
Switzerland's Holcim.  Local media has speculated that 
Chavez's action was partly motivated by growing domestic 
criticism that he has not delivered on promises of new 
low-cost housing, and that the steel and cement industries do 
not provide enough to the domestic market.  "The takeovers of 
both cement and steel industries will be used to breathe new 
life into construction in Venezuela, especially in the form 
of lower tier housing," Lehman Brothers analyst Gianfranco 
Bertozzi said in a research report. 
 
--------------------------------------- 
Ternium Sidor a Majority Argentine Firm 
--------------------------------------- 
 
 
¶5. (U) Ternium Sidor, state-owned before its 1997 
privatization and the fourth largest steel producer in Latin 
America, is 59.7% controlled by the Luxembourg-based (and 
NYSE-listed) Ternium Group.  The latter is controlled by 
Argentina-based Techint, a multinational conglomerate with 
interests in over 100 engineering, steel, oil, gas and 
service companies in more than 35 countries, and whose 
President is Italian-Argentine Paolo Rocca.  The GOV owns 
20.4% of Ternium Sidor, and its union 19.9%.  This 
nationalization also affects one of Brazil's major steel 
producers, Usiminas, which holds a 14.25% stake in Techint 
(and thus about 8.5% of Sidor).  Ternium also owns 
steelmakers in Argentina (Siderar) and Mexico (Hylsa); its 
stock price has fallen more than 15% since the announcement. 
 
--------------------------- 
Techint pleads for reprieve 
--------------------------- 
 
¶6. (U) Techint President Rocca reportedly asked Chavez in a 
letter to find a solution, and pointed to Sidor's efforts to 
assuage worker demands with a 130% salary increase, the 
incorporation of some 600 contractors into Sidor's permanent 
workforce, and increases for its 2,500 pensioners.  Rocca 
reportedly also highlighted the importance of strengthening 
Mercosur relations among Venezuela, Brazil and Argentina.  He 
also wrote to CFK to ask for her help. 
 
--------------------------- 
GOA weighs in - to no avail 
--------------------------- 
 
¶7. (C) According to media reports, Chavez ignored two calls 
from CFK seeking a reconsideration of the GoV's action, and 
that the decision could affect "Mercosur" investment.  GOA 
officials confirm she raised the issue with him, but did not 
give us details. The same media reports indicated that on the 
night of April 10, Chavez told CFK that it was the matter was 
final, and there was no chance for a revision.  However, 
Chavez apparently reassured CFK that the action would not 
otherwise harm GOV-GOA relations. 
 
-------------------------------------- 
Argentina Industry Plays Mercosur Card 
-------------------------------------- 
 
¶8. (C) One GOA minister told A/S Shannon that this was a blow 
to Mercosur as the project had Brazilian and Argentine 
investment and thus was an example for Mercosur integration. 
Argentine industry picked up this theme.  In an April 10 
meeting with EconCouns, Juan Carlos Lascurain, President of 
the Argentine Industrial Union (UIA) and ex-Techint 
executive, said that "the integration of Venezuela as a 
Mercosur partner requires amicable commercial relationships 
and mutual trust."  He subsequently repeated this same strong 
statement to the media.  Separately, the UIA also warned of 
"negative consequences" of the nationalization, in terms of 
the commercial and industrial relations between Argentina and 
Venezuela and within the Mercosur trading bloc.  The UIA also 
warned that the nationalization is already having a negative 
impact on companies that have started or are contemplating 
projects in Venezuela.  (Lascurain and the Argentine 
Industrial Union have been steadfast allies of the Kirchners, 
and Lascurain provided crucial private-sector support to CFK 
during the recent agricultural crisis.)  In a public speech 
on April 17, the Secretary of AEA, the Argentine Business 
Association for larger firms, called the move "very negative" 
for Argentina and Mercosur. 
 
------------------- 
Brazilian interests 
------------------- 
 
¶9. (C) Media reports noted that Techint also asked Brazil to 
get involved, given the Brazilian minority equity stake in 
Sidor.  The media noted that Venezuela's official entry into 
Mercosur still awaits Brazilian (and Paraguayan) Senate 
approval.  This approval was first delayed last year after 
Chavez referred to the Brazilian Senate as "parrots of the 
(U.S.) 'empire,'" in response to the Senate's official 
criticism of Chavez' decision to cancel the license of open 
air TV broadcaster RCTV (ref B).  CFK placed a call to 
 
President Lula to try to recruit his help, a GOA minister 
told us. 
 
------------------------- 
Argentine Media slams CFK 
------------------------- 
 
¶10. (SBU) Local media harshly condemned Chavez's "slap" 
against his supposed friend CFK, and the Kirchners' 
friendship/alliance with him in the first place.  An 
editorial in Argentina's second largest daily dismissed the 
GOV's excuse that the dispute was labor-related, saying that 
it represented just one more action on Chavez's part to 
accumulate power and control more sectors of the economy.  It 
also called for the GOA to re-assess its close ties with 
Caracas, not only because of Chavez's lack of respect for 
democratic institutions, but because he is now "threatening 
the economic interests of Argentina."  A prominent 
businessman called for a re-consideration of Venezuela's 
(still pending) incorporation into Mercosur.  A leading 
journalist from Argentina's second largest newspaper said 
that the main hurdle for President CFK now is to prove that 
her government is more than just a more moderate version of 
the Chavez regime itself.  Other media have echoed these 
themes. 
 
------------------------- 
Terms of Compensation TBD 
------------------------- 
 
¶11. (SBU) Media reports indicated that the GOV announced it 
will take control of Sidor "without stepping on anyone's toes 
and by paying indemnities as appropriate."  A committee has 
been formed to determine compensation; local media reported 
that CFK has tasked Planning Minister Julio De Vido ensure 
that Argentine interests get a fair hearing.  Media reports 
estimate the value of Techint's potential indemnification in 
the range of US$2.5-$3 billion.  The GOV says it is open to 
negotiation, and compensation could be in the form of cash, 
bonds, and/or shares.  Observers note that at this point it 
appears that the only thing that Argentine interests can do 
is hope for a fair price.  The media has reported that 
negotiations will also factor in the price that Techint pays 
for the large amount of iron ore it buys in Venezuela for 
steel mills elsewhere. 
 
¶12. (SBU) Chavez designated his Vice President, Ramon 
Carrizales, as the mediator.  Carrizales has also become a de 
facto voice of Sidor workers, and recently stated, "I am part 
of a workers' government, and Venezuela must re-gain its 
steel for its own development." 
 
------- 
Comment 
------- 
 
¶13. (SBU) The GoV's nationalization of Sidor represents yet 
another setback for the young CFK administration, which 
remains reliant on Venezuela for buying GOA bonds (ref C). 
It has caused local industry and media to question the value 
of the Kirchners' "brotherly" relationship with the 
eternally-controversial Chavez.  Local analysts point out the 
growing political cost of the relationship with Venezuela in 
light of the December 2007 "Valijagate" embarrassment, 
Chavez's unsavory ties to Iran and Russia, and perceptions of 
his increasingly autocratic rule. 
WAYNE