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It began as a badly conceived alumina forward-sale agreement by the then People’s National Party (PNP) administration through the government-owned Clarendon Alumina Partners (CAP) in 2004/05 with giant metals and energy trader Glencore International.

Fast forward to today, when the deal continues to bleed the Jamaican taxpayer, with billions of dollars in losses now exacerbated by a disastrous fire at CAP’s Clarendon production facility, recently halting plans to step up alumina production while still incurring billions in foregone income and other costs.

Meanwhile, as the plant is being restored from insurance payments of US$250 million, there is no clear picture of if, or when, it will be fully back on track due to questions about the type of fuel to be used to run the facility, as LNG has trippled in cost since the initial projections were made and the plant was not repaired to make it suitable for cheaper heavy fuel oil. This, as expensive staff twiddle their thumbs and overall production lingers at just 50 per cent of its 1.2 million tonne capacity, a fact which Finance Minister Dr Nigel Clarke, who has assumed responsibility for CAP, says represents a major threat to Jamaica’s (post-COVID) economic recovery at a cost of US$400 million annually in losses.

Who is picking up the tab?

The question naturally arises as to who is accountable? Who is picking up the tab for the billions in losses? A look at the history of the CAP deal with Glencore is instructive.

Alumina is the semi-refined white or almost colourless crystalline by-product of bauxite which requires further processing to make the metal aluminum. An exuberant Mining and Energy Minister Phillip Paulwell, seeking to reap what had not been sown, struck the deal before a combination of falling metals prices and a steep rise in oil prices, skewered its foundations, leaving the Jamaican government holding the proverbial bag and bleeding taxpayers of billions of dollars ever since.

The forward-sale agreement has haunted the Jamaican economy and, especially, its various agreements with the International Monetary Fund (IMF) for many years. It required that 50 per cent of the product was to be sold to Glencore at a fixed price. That price was established when the price of oil was only about US$45 or US$50 per barrel. But with alumina production being energy intensive, and with the price of oil rising to as high as US$145 per barrel at one point since, the deal became an albatrosss around Jamaica’s neck.

Subsequently, the country was forced to make budgetary provisions of some $12 billion between 2008 and 2012 at the expense of other critical necessities such as health, security and education, to reimburse Alcoa, which had to advance the funds to meet Jamaica’s unfunded share of the costs.

Hundreds of millions in losses

Analysts had estimated Jamaica’s accumulated losses of between US$400 million (J$40 billion) and US$500 million ($50 billion) up to around the end of March 2013. An accounting solution of sorts was arrived at in 2014 with the removal of the CAP bonds from its balance sheet and the reduction of debt owed to Jamalco which improved its equity position, but the loss-leading CAP continued to bleed red ink, accumulating a US$250-million deficit and long-term debt of US$447 million.

Paulwell’s evasion

Calls by the then JLP Opposition Spokesman on Mining, Audley Shaw for details of the agreement to be tabled in Parliament were initially met with evasion by Paulwell: “The details must be tabled in Parliament because we are mindful of the ruinous contract which was entered into with Glencore in 2004, that has cost us billions of dollars to maintain and has savaged taxpayers’ money,” the Opposition spokesman had said. Shaw had further raised concerns about developments in the government’s efforts to dispose of over US$400 million ($30 billion) in debt triggered by the forward-sale agreement.

Shaw had also expressed concern about a number of issues related to the then government’s efforts to tidy up the deal, including a one-to-one debt exchange of principal being offered to CAP noteholders by the government; a reported contract with Hong Kong-based Noble Resources for the sale of CAP’s alumina; and Glencore filing a claim against CAP in London for trading with Noble Resources.

“We were told that, from December 2012, the Government would have gotten out of the agreement with Glencore. So what is the basis on which Glencore has taken the Government to court?” Shaw asked.

Ostensibly, Paulwell said there was a need to review the agreement to ensure the best possible arrangement for Jamaica at that time in order to maintain and diversify the markets for Jamaica’s alumina exports.

Against that background, he said, Cabinet had decided to accept an option provided by Noble, which offered more advantageous arrangements for Jamaica and removed CAP as a burden on the national budget and consistent with the prevailing IMF agreement at the time. Noble Resources Limited is listed on the Singapore Stock Exchange and is Asia’s largest diversified commodities trading company.

Shaw however pointed out that the JLP was concerned about the effect of the new arrangement with Noble Resources on the new debt exchange, which resulted in the conversion of US$162 million ($16.2 billion at the time) in debt owed by CAP to bonds that will be owned by the Government.

“They need to bring to Parliament all the details of this exchange offer, and to indicate whether there are consequences for the Government in terms of additional costs resulting from the debt exchange,” Shaw had noted.

These debt obligations were eventually paid by the current administration when Finance Minister Nigel Clarke said in Parliament in August 2020, that CAP would be repaying debt obligations in the amount of US S136.7 million to the Noble Group by way of a loan from the Jamaican government.

London courts

Glencore had maintained that delivery of alumina to Noble would lead to a breach of CAP’s contractual obligationswith them and sought declaratory relief and monetary damages in the London courts, as well as an injunction against CAP supplying alumina to Noble, unless it can be assured of receiving its annual quantities. The London courts however did not uphold Glencore’s brief and shipments of alumina by CAP to Noble proceeded in late July of 2013.

Noble would later go on to acquire Alcoa’s majority ownership of the Jamalco alumina refinery in what Paulwell would describe as a deal that heralded Jamalco’s “return to profitability” and the clawing back of billions of dollars the Government had lost in the venture while saving the then administration’s face and allowing it to scrap plans to sell its 45 per cent share in the venture.

Paulwell based much of his optimism then on Noble’s stated intention to construct, by 2017, an efficient power plant for the refinery under a BOOT (build, own, operate, transfer) arrangement, which is expected to substantially slash its cost of production and rank Jamalco among the world’s more efficient operators due to modern production and  cheaper more efficient energy sources.

His expectations were also fuelled by an alumina sale agreement, at a higher price, as well as Rusal’s buy-back, for US$11 million, of the seven per cent stake Jamaica held in its Windalco alumina refinery.

The cash from the Rusal deal was applied to a remaining US$21-million debt Jamaica had with the Russian firm.

“We now stand the real prospect of recouping those losses by the emergence of Noble in Jamalco,” Paulwell had said in an interview with the Financial Gleaner at the time.

What lies in the future?

Only time will tell the fate of the facility and Jamaica’s tenous relationship with alumina production. “…We are in a race against time. The shareholders of Jamalco – CAP and the Noble Group – will have to be smart, practical, businesslike, strategic and technically proficient,” Clarke noted in a recent interview.

Jamaica in 2007 said it had no business owning and operating loss making entities like Air Jamaica and the Sugar Company of Jamaica, “so why are we owning and operating bauxite and alumina entities? We must sell, regulate, tax and be accountable to the people of Jamaica! This has been accepted by successive PNP and JLP administrations and all manner of international financial entities”, noted a former government minister who opts to remain nameless.

“Jamaica always seems to be at the losing end of these transactions Alcoa – Glencore and Noble – Who will clean the Augean stables?” he asks.