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12.11.2008 Business & Finance

An integrated aluminum industry to be built in Ghana?

By myjoyonline
An integrated aluminum industry to be built in Ghana?

Over the past 50 years, and particularly since the 1983 structural adjustment programs, Ghana has been attempting to build a vertically integrated aluminum industry in order to transform its agriculture-based, extractive economy to an industrial one. An integrated aluminum industry is to serve as the catalyst for the transformation. A vertically integrated aluminum industry consists of mining, refining, smelting and fabrication with bauxite and cheap electricity as the key inputs.

The Kufuor administration is reportedly negotiating with the aluminum multinationals to build an integrated aluminum industry in Ghana. These efforts have culminated in the Ghana government purchasing from Kaiser Aluminum 90 percent shares in the Valco smelter with Alcoa having the remaining 10 percent shares. Ghana and Alcoa recently signed a memorandum of understanding (MOU) as partners to run the smelter. According to the MOU, the first step in the process to integrate the aluminum industry in Ghana would be to re-start the idled smelter, and the next step would be to develop an expedited feasibility study and timetable for setting up a refinery and bauxite mining, and the upgrading of rail transportation and other necessary infrastructure improvements.

This article examines the new moves being made to build an integrated aluminum industry in Ghana in order to provide other options to be considered to serve the Ghana's best interests. First, brief background information is necessary to provide a context within which the options are discussed.

Background

Ghana has vast deposits of high-grade bauxite at Awaso in the Western Region (presently mined by the Ghana Bauxite Company – 80% Alcan, 20% Ghana – with about 500,000 metric ton per year (mtpy) capacity, ranking as Africa's third largest producer of bauxite) , and unexploited deposits at Nyinahin in Ashanti Region, and near Kibi in Eastern Region. Ghana has hydroelectric facilities at Akosombo and Kpong on the Volta River; and a nascent aluminum fabricating industry spearheaded by an intermediary, Aluworks with 20,000 ton per year (tpy) capacity. Thus Ghana is home of almost all major phases in aluminum processing, but not in an integrated form. While bauxite is exported to refineries in Scotland and Canada, alumina was imported from Jamaica and the US for the local smelter.

The desire to tap Ghana's rich bauxite deposits and hydroelectric potency dates as far back as the 1920s when Ghana (then Gold Coast) was a British colony. During World War I bauxite was mined by British Aluminum in two mines, Ejuanema and Awaso, to supply the Allied forces with aluminum for the aircraft industry. With increased demand for the new strategic metal—aluminum—after World War I, the Gold Coast Geological Survey Department drew the colonial government's attention to this industrial potential in Ghana. This was formulated as the Volta River Project (VRP).

However, right from its inception to the present, the Volta River Project has been a pawn that has been used to keep the country in neo-colonial state. The aluminum multinational corporations have, through their monopoly over capital and technology, frustrated Ghana's effort to build a vertically integrated aluminum industry. At one point or the other, the aluminum multinational corporations have had the tacit, subtle or open support of their home governments who found the project an important tool for global geopolitics. In the Cold War atmosphere of the 1960s, for instance, the VRP was used by the US with the help of Britain in order to turn Nkrumah on a reasonable course and to counterbalance the perceived Ghana's increasing close relations with the Soviet Bloc.

The VRP had been at the top of the Nkrumah's government industrial plan for Ghana since 1951. In compromising by sacrificing Ghana's shareholding interest in the smelter and foregoing the immediate building of a refinery, Nkrumah envisaged using the VRP to further his African Unity ambition—“we would be more than willing to share its benefits with our immediate neighbors within a common economic framework,” Nkrumah declared. Nkrumah's, as well as Ghana's, dream of economic transformation was to be deferred as he was overthrown in 1966 in an alleged CIA-backed military coup. The military junta that assumed power—the National Liberation Council (NLC) scrapped Nkrumah's industrial plans.

From the viewpoint of the U. S. government and Kaiser, the VRP scheme as carried out was a success. The US Government did not only provide loans to Ghana in building the Akosombo Dam and the hydroelectric project. It also provided bargain rate loans and guarantees to the aluminum multinationals in building the smelter and to protect the companies in case their assets in Ghana were to be nationalized as companies feared. Valco alone represented about 20 percent of the profits of Kaiser's global operations, and the low-cost hydroelectricity from the Volta dam saved Kaiser over $100 million in operation cost alone since 1973 when OPEC took control over crude oil pricing. It is estimated that from its initial production year in 1967 when Valco operated at a loss of $670,031 to 1981, the smelter earned its owners a total of $146,650,685 in after tax profits. Then Valco's Managing Director Ward B. Saunders in a reply to a critic wrote, “We take great pride in the Valco organization and the Ghanaian people who, through their efforts, make it the excellent enterprise it has become.”

The VRP has not helped Ghana to industrialize either through the electricity aspect or the aluminum aspect. Neither has it helped transform the country's agriculture through the irrigation and fisheries components of the original scheme. In 1966 when Nkrumah's administration was overthrown, the International Monetary Fund (IMF) sent the Havard Development Advisory Service (DAS) team headed by Dr. Gustoph Papanek to Ghana. The team advised the NLC administration to cancel Nkrumah's industrial projects that would have benefited from the cheap hydroelectricity. As a result, electric power surplus was created and Valco quickly expanded its smelter capacity to the point that the smelter alone at one point in time consumed about 70 percent of the hydroelectricity from Akosombo. Because of the vagaries of the weather and increased demand for electricity, Ghana has had to import crude oil to run a thermal plant near Takoradi to supplement the hydroelectric power.

Alcoa to build an integrated aluminum industry in Ghana?

It would be recalled on November 24, 2004 Alcoa announced that its affiliate (AWAC), Alcan and the Government of Guinea had signed a protocol for developing jointly a 1.5 million metric ton per year (mtpy) alumina refinery in Guinea. AWAC and Alcan each holds a 45 percent interest in Halco (Mining) Inc., which in turn is a 51 percent owner of Compagnie des Bauxites de Guinee (CBG) that currently mines bauxite for export from the Boke region in Guinea. Alcoa and Alcan intend to secure bauxite supplies to the refinery from CBG. Alumina production from this joint venture is expected to be on stream by 2008. The refinery will be operated by Alcoa.

On another front, the Jamaica Gleaner newspaper reported on July 14, 2005 that “The Board of Alcoa will on Friday [July 15, 2005] decide on a proposed US$1.24 billion expansion of the Jamalco bauxite refinery at Halse Hall, Clarendon. Alcoa's management was speaking during a visit to the refinery on Tuesday [July 12, 2005] by Ghanaian President Jon Kufuor. Seventy-seven million U. S. dollars towards expanding production has already been granted and the overall expansion, expected to be completed 2008, will see production increase from 1.25 to 2.8 million tons per year. This follows from 2004 expansion from one million tons following a US$125 million investment.”

The same company, Alcoa, that is expanding its business in Guinea and Jamaica, is promising to integrate the aluminum industry in Ghana. Analysts all agree that expanding an existing refinery, that is, brownfield expansion, reduces the investment cost per ton of alumina by as much as 40 percent. One wonders why will Alcoa want to undertake to build a new refinery, that is, a greenfield expansion in Ghana when it would be cheaper to undertake brownfield expansion in Guinea and/or Jamaica.

Alcoa stands to gain a market for its alumina in the short-term until a refinery to produce alumina from local bauxite is built in Ghana. Alcoa will secure a steady source of aluminum without building a new smelter from scratch. It will also benefit from technical, operational and technology transfer and other service fees. The company will off-take Ghana's share of the aluminum to be produced. And “the final integrated industry agreement would make Alcoa the majority owner and operator of the total joint enterprise (mining, refining, and smelting projects) with significant participation by the Government.”

A brief contemporary history of the aluminum industry

The history of the aluminum industry is that no third world country has been able to develop a vertically integrated aluminum industry—that is, no third world country has the mining, refining, smelting and fabrication vertically integrated. Where a third world country has the mining and refinery, the same company does not own the operation of each of the phases. Jamaica is a good example of such arrangement whereby Jamaica has the mining and refining, but no smelter. The mining and refinery are owned by different companies and/or different subsidiaries of the giant aluminum multinationals. The Guinea case described above is another example in point.

The North American aluminum industry has been a prime example of consolidation and global growth in recent years. The North American aluminum industry is dominated by the two sister companies – Alcoa and Alcan. Alcoa's growth by acquisition in the last 10 years and its current tendency to replace North American capacity with overseas plants is evidence of the impact of commoditization on the aluminum market. Alcan's absorption of Alusuisse and its acquisition of Pechiney SA of France is more of the same trend. The contraction in the number of players in the market is not cyclical—it is structural. The recognition that primary aluminum, and indeed many downstream aluminum products are commodities rather than products, is the key to the future of the business.

The key success factor in the aluminum industry is low cost production which requires access to cheap electric power. Smelting plants worldwide are sited in places where there is access to cheap electricity. It appears Alcoa wants the Valco smelter reactivated because of the possibility of securing on long term basis cheap power from VRA from the existing hydroelectric facility and potential cheap power from the West African Gas Pipeline Project. That may be the rationale why Alcoa seeks a final integrated industry agreement that would make Alcoa the majority owner and operator of the total joint venture.

Ghana has the Volta Dam hydro-electricity. However, electricity in Ghana is no longer cheap because of rising energy prices fueled by the rising crude oil prices and increased domestic consumption of electricity. The Volta Dam has also been plagued by incessant low water levels because of vagaries of the weather. One would recall the difficulty VRA had in trying to increase power tariff for Valco when VRA faced increasing operation costs because increasing cost of borrowing and as it added a thermal plant to make up for power shortfall because of low water levels on the Volta dam. Kaiser cited a long-standing agreement with VRA a reason for refusing to pay over 1.1 cents per kwH for its power.

The mistake Ghana made in the original Valco agreement in 1962 with Kaiser was in setting power tariff contingent on a lame promise by the aluminum multinationals to develop an integrated aluminum industry in Ghana. This mistake should not be repeated by the Kufuor administration. By reactivating the smelter before any concrete steps are put in place to build a refinery in Ghana may recreate the past scenario where the aluminum multinationals used the lame excuse of “prevailing market conditions in the aluminum industry” to frustrate the country in developing an integrated industry.

Options for building an integrated aluminum industry in Ghana or in the West African region?

If Ghana really wants an integrated aluminum industry in the country, Ghana should consider having a substantial share (35-45%) in the alumina refinery and increase its off-take of aluminum (up to 50%) from the smelter for its intermediary fabricating plant, Aluworks. This will enable Ghana to build on its small-scale aluminum fabrication industry. The share in the refinery is to facilitate Ghana securing its own source of alumina in order to build advanced factor advantages in the form of special skills and know-how that are particular to the industry. That will place Ghana in a more competitive advantage as it will gain a better understanding of the technology and the complexity of running an integrated aluminum industry. The increased off-take of aluminum from the smelter will facilitate the possibility of Ghana undertaking fabrication that will include casting, rolling, forging, drawing, or extruding—some of the ways in which aluminum can be used to make thousands of different finished products, from beverage cans to car engines and other automotive parts to jet aircraft. It will enable Aluworks to expand its product line and sales to markets in West Africa and the rest of the world. By expanding Aluworks' capacity, more jobs will be created in the formal and informal sectors in wayside or cottage enterprises, and further down stream in the distributive trade. Such expansion will also facilitate the local human resource development of required skills and specialized knowledge and metallurgical research work in the country's educational system. Although the aluminum industry as a whole is a very important industry for Ghana, there is no government or industry-sponsored research or training institution providing specific support for the industry. This anomaly in capacity building must be rectified if an integrated industry is to be developed.

As matter of fact, Ghana should envisage a local aluminum industry that will be linked with Ghana's manganese industry. Although ranking far behind steel, the second most important metal in which manganese plays an important alloying role is aluminum. Aluminum-manganese alloys and aluminum-manganese-magnesium alloys, which have been sold under different trade names, have found applications in such diversified areas as kitchenware, roofing, car radiators and transportation. By far the most important use of aluminum-manganese alloys is for beverage cans, of which some 100 billion units are produced each year.

On the other hand, Ghana should seriously evaluate and pursue possibilities for an integrated aluminum industry in the West African region. One such possibility that must be considered now is the possibility of harnessing the bauxite and energy resources of the region. Ghana (mining, smelting and fabrication), Sierra Leone (mining), Guinea (mining and refining), Nigeria (smelting and fabrication) and Cameroon (smelting) have in place various phases for integrating the industry in the West African region. This existing structure of the aluminum industry in the region should be linked with the energy resources of the region. Ghana supplies electricity to Togo and Benin. Ghana, Togo, Benin and Nigeria will soon be linked by a natural gas pipeline. Chad and Cameroon are linked by a petroleum pipeline. Chad began pumping its first oil in July 2003 following the completion of the Chad-Cameroon pipeline. Chad 's proven oil reserves are situated mainly in the Doba basin, near its border with the Central African Republic . The Doba basin's three oil fields (Bolobo, Komé, and Miandoun) are estimated to contain reserves of 900 million barrels. A foreign consortium led by ExxonMobil (40% interest) is in charge of developing the Doba basin. Equatorial Guinea, Gabon and Angola, all with energy resources should be linked with aluminum resources of the sub-continent into building an integrated aluminum industry.

This option may not come of easily because of internecine problems within ECOWAS and other economic unions of the sub-continent. Cameroon, Chad, Gabon, Equatorial Guinea and Angola are not members of ECOWAS. Besides, the multinationals involved in the various countries in the aluminum and energy sectors will resist any attempt to shake off the neo-colonial structure they have put in place. Despite their pronouncements of seeking the economic development of impoverished and highly indebted poor countries of the West African region, oil-dependent western countries will rather maintain the status quo ante than fund the economic self-sustainable development of West Africa.

Irrigation and other options

Ghana needs to re-evaluate the original Volta River Project in order to develop the options of agricultural transformation through irrigation; fisheries; and lake transport to link Ghana and its neighbors to the north. Irrigation of the Accra and Afram Plains needs not draw water from the Volta Lake. Water from the Lake that flows freely into the sea can be harnessed for irrigation to transform the rain-fed agriculture in the country. It is estimated that well planned farming in the draw-down area around the Volta Lake alone can produce about a third of Ghana's annual rice needs. Freshwater fisheries between the Adomi Bridge and the Sogakope Bridge alone can supply the country's annual fish needs.

Another important option that must be carried out is the development of medium and small-scale hydroelectric projects on Pra, Tano, Ankobra, Todzi and other rivers of the country. The Pra, Tano and Ankobra Rivers are, for example, in the rain forest belt that has shorter dry season period than the rivers of the Volta-basin that are in the much drier savannah or sahel belt to the north. It is of strategic and security importance for a developing country like Ghana to 'walk on two legs' by not putting all its eggs in one basket in the form of a centralized power grid derived from large-scale hydro and thermal power plants. Large dams entail more security risks as they are easy targets virtually indefensible from either external or internal saboteurs. A decentralized power system is an insurance against power outages that could black-out the whole country. A decentralized power system has its political and economic advantages too. A decentralized power system should be considered in developing an electrified rapid rail system to link the more flat northern Ghana with neighboring countries.

Small-scale hydro-electric projects will facilitate small-scale industrial and agricultural projects in the rural areas. This will promote a more balanced economic development of the country as contrasted with present urban-centered development with its attendant problem of migration of the rural youth to the urban areas.

Which of these options will the Kufuor administration choose to pursue for a self-sustainable development of Ghana? Does he want to intensify Alcoa's global presence in the aluminum industry by giving away Ghana's bauxite and energy resources for a sop, or does he want to promote Ghana's economic development take-off?

Author: Nana Adinkra [[email protected]]

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