February 22, 2013 / 5:27 PM / 6 years ago

Analysis - Little investment, protests hit Venezuela metals output

CARACAS/NEW YORK (Reuters) - Venezuela’s once-buoyant metals industry is on the verge of collapse as it struggles with worsening Labour disputes, outdated technology, and maintenance problems following years of under-investment.

Output by the state-owned iron ore, steel and aluminium industries all plunged to their lowest levels in almost three decades last year.

Traders say the industry desperately needs new funds, but that it appeared officials were making no decisions about the sector while Socialist President Hugo Chavez lies in hospital after returning from cancer surgery in Cuba.

“The industry has been drained and made to produce as much as possible without any investment on hardware or spare parts,” said one U.S.-based aluminium trader. “You can push a car only so far until it breaks down if you don’t do any maintenance. This is the breaking point for the metals and mining industry.”

Venezuela boasts the biggest oil reserves in the world and for the last 100 years, the way this asset has been managed has distorted the economy. The country is vulnerable to global oil price shifts and imports the majority of its consumer goods.

Its focus on crude has led to the relative neglect of the metals industry. Venezuela was once a top ten producer of aluminium, but now no longer features in the statistics, and some local companies are even looking to import aluminium.

The OPEC nation also boasts one of Latin America’s largest iron ore deposits, but it is losing customers because strikes mean it has problems getting its product to market.

Such protests by workers demanding better pay and conditions have intensified since Chavez largely disappeared from public view after winning re-election in October. He flew to Cuba in December to undergo his fourth cancer operation in 18 months. Aides say his condition remains “delicate”.

Curbing the impact of any new investment in all the government-run metals producers is that they still have to sell their products to the domestic market at a subsidized price.

SIDOR: OLD PEARL OF THE CARIBBEAN

Sidor is Venezuela’s largest steel company with an installed annual capacity of 5 million tonnes of liquid steel. But output nose-dived after it was nationalized in 2008.

Officials blamed the fall in output on a severe energy crisis that hit the South American nation between 2009 and 2011 and forced the authorities to ration energy to the industry.

The blackouts were caused by a drought that cut hydropower production. Since then, the rains have returned and last year the government promised the sector would bounce back.

It didn’t. This month, a state commission that reports directly to Chavez visited Sidor seeking answers after production fell to 1.7 million tonnes in 2012 - less than half of what it produced in 2007, and the lowest level in 26 years.

Workers are demanding the resignation of its president, Rafael Gil, accusing the company’s leaders of mismanagement.

Gil, Sidor’s fifth president in five years, rejects the criticism and forecasts Sidor will begin its turnaround this year, and that production will recover to 4.45 million tonnes.

“We have no doubts that the plans of the state-run companies will result in greater efficiency, as our commander-president ordered...Sidor can recover 100 percent,” he said.

Many Sidor workers dismiss that as fanciful talk, although loyal “Chavista” union leaders told Reuters Sidor could see a quick improvement - if given attention by the government.

IRON ORE

Thanks to large reserves of natural gas and bauxite, Venezuela was once the world’s top exporter of hot briquetted iron (HBI), but is being overtaken by competitors such as Russia.

“There’s a lot of iron ore, enough to produce whatever is necessary. But from a technical point of view, the plants are not producing well,” said one Caracas-based HBI trader.

State-owned Ferrominera is the country’s top iron ore producer. It has been producing below its capacity of 25 million tonnes a year for nearly a decade. Ferrominera workers said it had produced around 17 million tonnes in 2012.

They said there have been delays in shipping for the last few months because strikes have paralyzed dredging operations in the Orinoco river.

This has had a big impact on deliveries, the Ferrominera workers said, adding that there are now about 20 large ships at anchor just waiting for the water to rise enough for them to move.

“Demurrage costs and damage costs related to running aground run into the millions,” said a UK-based iron ore trader.

“It’s proving to be a headache for all vessel owners trying to pick up material in the area. Many have decided not to load until May, when the usual depth of the river will be restored.”

ALUMINUM: FROM EXPORTER TO IMPORTER

With two aluminium smelters and installed capacity of 600,000 metric tonnes a year, Venezuela also used to be a top global player in the aluminium market. The decline began in 2008.

“We used to buy a lot of aluminium from Venezuela but no more,” said a U.S.-based aluminium trader. “We haven’t moved a tonne since May, mainly because there is no primary origin there. There are no operations at the (bauxite) mine.”

Outdated technology in need of improvements and repairs at aluminium smelters Alcasa and Venalum that were postponed have also caused output to fall by more than half. On Friday, Venalum declared force majeure on exports due to another Labour dispute.

Traders said the country was now being forced to look for imports.

“Things got so bad that we constantly receive the invitation from (the Venezuelans) asking us to sell them primary aluminium. That is how bad it is,” the aluminium trader said.

Editing by Daniel Wallis and Leslie Gevirtz

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