Guinea’s New Leaders Face the Big-Chill in the Global Aluminum Market

Last Spring, several leading aluminum industry analysts were predicting prices in excess of $4000 US per ton by year’s, mainly driven by demand from China and higher production costs. (1) http://www.aluminiumleader.com/en/serious/news/2008/06/25/analistsaluminiumprice

As of this week, as yet another indication of the major disruptions taking place in the global economy, prices on the spot market are around $1400 US per ton, an astounding deviation from relatively recent predictions and yet another example of how a growing recession in the U.S., China and elsewhere is driving down prices and demand across the board as demand fizzles and inventories pile-up.

Another factor which is likely going to have an impact on aluminum prices going forward is the recent coup in Guinea.  Despite being the landlord of almost half of the world’s reserves of bauxite — the basic ingredient in the aluminum making process —  as well as being the fourth largest producer, Guinea is one of the poorest and least transparent countries in the world. It has literacy rates of approx. 30% and life expectancy of 56.  It’s recently deceased President-for-life, Lansana Conte, had ruled for almost 25 years and was only the country’s second leader since Guinea was granted independence from France in 1958.

Leaders of the relatively bloodless coup, a group of second-tier, virtually unknown military officers who call themselves the National Council for Democracy and Development, have already indicated that all mining contracts and joint-venture deals with foreign multi-nationals will be reviewed and ‘enhanced’ for the benefit of the people of Guinea. Indeed, several mining firms operating in Guinea have already been contacted by representatives from the military but thus far no demands have been made and for the time being operations seem to be running business-as-usual. (One exception was a foreign gold mining venture that was asked to shut down operations but was then granted permission to start-up almost immediately suggesting Keystone Kop decision making at work more rather than revised mining policies.)

However, if the history of African coups in resource-rich nations is any guide this will likely soon be a painful process for the multi-nationals in question and will likely result in higher operating costs, greater royalties, and various requests for ‘special’ pay-outs to lubricate transactions with the new junta. The likely excuses given for these added fees will be that the companies in question have to do more to help the people of Guinea as the previous government was something of a kleptocrat’s paradise and those wrongs must now be righted. (Despite the optimism of the World Bank’s country representative who sees some promising signs in the anti-corruption rhetoric of the new leaders, there is really no great reason for optimism as no one in the government past or present has a track-record in Guinea of sound public finance management.) The end results will likely be painful hits to bottom lines of the big manufacturers who are already reeling from the aforementioned slackening of global demand.

It is commonly understood in resource-rich African nations that the tip-of-the-spear of corruption occurs at the moment that international contracts are signed. Africans know all too well that the political and governmental elites use resource revenues to enrich themselves and their closest supporters while the majority of citizens see almost no benefit. In Guinea, where the ruling elites have been in power for decades, the pent-up demand for wealth-sharing will likely lead to some degree of internecine scrumming within the ruling factions if not outright civil conflict of the type that was on display in 2007. There will also be a significant increase in pressure on the international investors to come up with better profit-sharing deals.  The vagaries of the international aluminum market are likely to be less interesting to Guinea’s new rulers than the prospect of breaking into the money-pits that were once the exclusive preserve of the Conteh family and their supporters.

What will likely go by the wayside are projects like the proposed multi-billion dollar refinery operation that Alcoa has been studying for the last several years. This would have brought even more value to the Guinean economy as they would have been able to export value-added product and significantly upgrade the skills of their industry workforce. In a related example, global giant Rio Tinto has also cancelled plans to develop a $6 Billion U.S. iron-ore project. The ostensible reason given by Rio Tinto is the general downturn in the global economy but it is not hard to imagine that uncertainty in dealing with the junta also played a part.

Whatever the long term prospects are for Guinea in the global aluminum market and its relationships with companies like Rio Tinto, Alcoa and Russia’s Rusal, the international players will have to prepare themselves for months if not years of frustrating negotiations, contract reviews and demands for cash.  With the breath-taking drop in global prices and the fall-off in global demand the multi-nationals will be in no mood to make big concessions so the result will be some interesting stand-offs.

The real losers in all of this will be the down and out citizens of Guinea. But there is no news there.