Industry Trend Analysis - Tax Dispute To Slow Output Growth - JULY 2015

BMI View : Jamaica's share of global bauxite production will slide downwards as output will slow due to ongoing mining tax dis putes and weak aluminium prices.

Ongoing mining tax disputes between the will slow the country's bauxite output growth over the coming years. In addition, weak aluminium prices will indirectly curb the sector's growth outlook. We forecast Jamaica's bauxite output to grow from 9.9mnt in 2015 to 10.3mnt in 2019. This would represent an average growth of 1.0% y-o-y over 2015-2019, significantly slower than 5.0% over 2010-2014. This will result in the country's bauxite sector contribution to GDP decreasing from 1.2% in 2015 to 0.9% in 2019.

Jamaica's bauxite output growth will slow for the following reasons. Firstly, although the Jamaican government and Noranda Bauxite Limited reached an interim agreement for a higher bauxite export levy on June 12 2015, both parties will remain at odds over a long-term solution. Under the agreement, which will apply until December 31 2015, Noranda will pay USD5.0 for each tonne the firm exports from Jamaica, up from USD2.5 beforehand. The administration wants to raise the tax on bauxite, as it believes the current tax levy is too low. The current bauxite export tax was implemented in 2009, with the government accepting a lower tax levy to support domestic producers, as aluminium prices averaged USD1,704/tonne, significantly lower than USD2,623/tonne in 2008. Over the last two years, the government and Noranda disagreed on the tax rate, with the former insisting on USD7.5/tonne, while the latter insisted that the applicable rate was USD2.5/tonne. In our view, negotiations will take place over a longer period after the expiry date of the interim agreement, as both parties will be unwilling to compromise. Noranda's negotiation position will be strong, as the firm's Jamaican operation produces on average 4.5mnt per annum (mntpa) of bauxite, accounting for 40-50% of the country's total bauxite output. Secondly, besides domestic tax disputes, Jamaica's bauxite output growth will slow due to continued aluminium price weakness. We forecast aluminium prices to average USD1,940/tonne over 2015-2019, lower than USD2,090/tonne over 2010-2014. Both factors will result in Jamaica's share of global bauxite production decreasing from 3.7% in 2015 to 2.9% in 2019.

Disputes To Slow Growth
Jamaica - Bauxite Mine Production (mnt) & Growth y-o-y (%)
f= BMI forecast. Source= National Sources, BMI

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