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C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000211 
 
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E.O. 12958: DECL: 2020/02/22 
TAGS: ECON VE EIND EINT EINV EMIN ENRG ETRD
SUBJECT: GBRV SELLS ALUMINUM TO TRANSNATIONALS INSTEAD OF LOCAL 
COMPANIES 
 
REF: 09 CARACAS 1595 
 
CLASSIFIED BY: DUDDY, AMBASSADOR, DOS, AMB; REASON: 1.4(B), (D) 
 
¶1.       (C)  SUMMARY:  The Venezuelan government (GBRV) is selling 
state-produced aluminum to multinational companies and 
undersupplying local fabricators, according to a private sector 
aluminum entrepreneur.  State-owned aluminum companies Alcasa and 
Venalum have decreased production following a 
government-implemented energy rationing program, although the two 
companies still produce enough aluminum to satisfy local demand. 
The Basic Industry and Mining Ministry (MIBAM) signed two forward 
sale aluminum contracts with Glencore International and Noble 
Resources in 2009, and the GBRV has apparently decided to honor 
those agreements instead of meeting local demand.  According to 
February 5 press reports, Alcasa Labor Director Henry Arias asked 
MIBAM to cut its supply agreements with Glencore and Noble in half 
to supply local fabricators, many of whom have substantially 
reduced their output due to raw material shortages.  In addition to 
these shortages, local aluminum fabricators face a number of other 
challenges, including a 100 percent increase in the price of 
state-produced aluminum, frequent power outages, minimum wage 
increases, and the cancellation of a line of credit from a 
government development bank.  END SUMMARY. 
 
 
 
¶2.       (C)  On January 20, private sector aluminum entrepreneur 
Jorge Monch (strictly protect throughout) told EconOff that 
state-owned aluminum companies Alcasa and Venalum have dramatically 
cut their supply of aluminum to Venezuelan fabricators.  In 2009, 
Venalum produced 430,000 tons of aluminum and Alcasa produced 
110,000 tons, but Monch expected Venalum's annual output to drop by 
160,000 tons this year after the company shut down 440 production 
cells as part of a government-implemented energy rationing program. 
(NOTE: On February 5, the press reported that Venalum had shut down 
360 cells.  Aluminum production is highly energy intensive-the 
price of electricity represents 43 percent of the total cost of 
production in Venezuela, according to Monch.  END NOTE). 
 
 
 
¶3.       (C)  Nevertheless, Monch speculated that the GBRV was 
using the electricity crisis as an excuse for reducing the aluminum 
supply to local companies.  According to Monch, Alcasa and Venalum 
still produce enough aluminum to satisfy local demand.  The real 
issue, he said, is that the Basic Industry and Mining Ministry 
(MIBAM) had signed two large multi-year contracts with 
transnational companies and decided to honor those agreements 
instead of supplying local Venezuelan fabricators.  In October 
2009, Venalum signed a USD 1.2 billion forward sale contract to 
supply the Swiss company Glencore International with 360,000 tons 
of primary aluminum and cylinders over six years, according to 
press reports; Venalum signed a similar contract with Noble 
Resources for 50,000 tons.  Monch said that MIBAM used the money 
from these agreements to pay worker salaries and December bonuses 
instead of reinvesting in Venalum and Alcasa.  "The government is 
slowly liquidating the basic industries," Monch said. 
 
 
 
¶4.       (SBU)  On February 5, the press reported that workers at 
Alcasa had asked MIBAM to cut its supply agreements with Glencore 
International and Noble Resources in half in order to increase the 
aluminum available for Venezuelan companies.  The workers made this 
request based on Decree 3895, published in the Official Gazette in 
September 2005, under which Alcasa and Venalum must guarantee the 
aluminum supply for local fabricators.  Alcasa Labor Director Henry 
Arias told the press that both private Venezuelan companies and 
state-owned fabricating companies have been forced to reduce output 
because of raw material shortages.  According to press reports, the 
state-owned company Cabelum, which manufactures cables, only 
receives 600 tons of aluminum per month (t/m) instead of the 2,000 
t/m it received previously.  Aluminum foil manufacturer Alucasa and 
Rialca have also been forced to reduce production levels.  "We are 
sending more than 12,000 t/m to Glencore and Noble...which in other 
words means we are fulfilling agreements with multinational 
companies at the cost of lowering the supply goals for local 
 
CARACAS 00000211  002 OF 002 
 
 
fabricators," Arias said. 
 
 
 
¶5.       (C)  Monch, who owns the Alucenca aluminum plant in Cagua, 
said that he previously purchased 500 t/m from Venalum under a 
contract that expired in December 2009.  In January 2010, Venalum 
representatives told Monch in a telephone conversation that they 
could only sell him 100 t/m in 2010.  Monch said he has been 
purchasing aluminum from Venalum for over 30 years and that his 
company would go bankrupt without at least 307 t/m due to the small 
profit margins in the aluminum business.  In a conversation with 
EconOff on February 10, Monch said that he was hoping to sign an 
addendum with Venalum to increase the monthly tonnage of his supply 
contract.  (NOTE: Monch told EconOff that he coincidentally bumped 
into National Assembly Deputy Jose Albornoz on a flight from Puerto 
Ordaz to Caracas.  Monch explained the desperate circumstances of 
his aluminum business to Albornoz, who later told Monch that he had 
discussed the situation with President Chavez on January 19 and 
that Chavez was going to raise the issue with Basic Industry and 
Mining Minister Rodolfo Sanz.  END NOTE.) 
 
 
 
¶6.       (C)  Monch estimated that there are approximately 75 local 
aluminum fabricators in Venezuela employing some 7,000 workers. 
The owners of the other large aluminum fabricators told Monch that 
they have also had their supply contracts with Venalum cut by 60 to 
80 percent.  In addition to the supply shortages described above, 
Monch highlighted other difficulties facing local aluminum 
fabricators: 1) the price of state-produced aluminum has increased 
by 100 percent following the devaluation announced on January 8 
(from 2.15 bolivars per USD to 4.3 bolivars per USD); 2) frequent 
power outages, as often as three times a week at Monch's plant in 
Cagua, have disrupted production and damaged sensitive machinery; 
3) on January 15, President Chavez announced two planned minimum 
wage increases for 2010-10 percent in March and 15 percent in 
September; 4) the GBRV has cancelled a line of credit for local 
producers with the government-owned development bank Banfoandes 
after its recent merger into Banco Bicentenario (Ref A).  According 
to Monch, Banfoandes' former clients have been asked to apply for a 
new line of credit with Banco Bicentenario, a process that could 
take up to six months. 
 
 
 
¶7.       (C)  COMMENT: The apparent decision to honor contracts 
with Glencore and Noble and sell aluminum to transnational 
corporations at the risk of bankrupting Venezuelan companies 
highlights a contradiction in the GBRV's socialist development 
model: the government claims to support and encourage domestic 
production but many of its macroeconomic policies have been 
counterproductive to growth.  MIBAM is in a difficult position 
because it could conceivably face international legal proceedings 
if it fails to meet its contractual obligations, but the fact that 
the GBRV used the proceeds from its agreements with Glencore and 
Noble to pay wages and December bonuses-rather than reinvest in 
Venalum and Alcasa-is further evidence of both the insolvency and 
mismanagement that is characteristic of many of the large 
state-owned companies.  END COMMENT. 
DUDDY