Venezuela - Industry

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Industry

Venezuela entered the 1990s poised to become a leading international producer of coal, iron, steel, aluminum, gold, and other minerals. In the late 1980s, the industry employed less than 1 percent of the labor force, accounted for less than 1 percent of GDP, and contributed 13 percent of exports. These figures were likely to increase, however, as expanded capacity became operational in the 1990s.

The state historically played a prominent role in mineral policy and production. Beginning in the 1970s, the government obtained or established scores of mining enterprises in its pursuit of heavy industrial development. By the 1980s, however, the huge debts incurred by these ventures contributed to the government's decisions to reconsider restrictive foreign investment policies and to liberalize mining laws in an effort to expand private-sector participation in mining. The CVG, the country's most prominent regional development corporation and the major player in mining, increasingly entered into joint ventures with foreign companies by the 1990s, when for the first time the CVG agreed to accept a minority share in some ventures. In addition to its role as planner and coordinator of most of the country's mining, the CVG was one of Latin America's largest industrial groups, with 30 subsidiaries and 41,000 workers in 1989. According to government sources, the CVG and its affiliates accrued US$1.3 billion in profits from 1985 to 1989 and generated US$3.3 billion in foreign exchange.

The bauxite and aluminum industry, traditionally smaller in size than iron and steel, installed significant new capacity in both mining and processing during the 1980s. As a result, aluminum became the country's second leading foreign exchange earner. By 1990 Venezuela boasted the largest installed capacity in aluminum in all of Latin America. Moreover, the country was believed to be world's most economical producer of aluminum because of its vast high-quality bauxite reserves, its abundant and cheap energy, and its well-developed infrastructure. Proven bauxite reserves stood at 500 million tons in 1990, with probable reserves as high as 5 billion tons. Overall, the country's smelters, including as many as 1,500 small foundries, produced approximately 443,000 tons of primary aluminum in 1988. About 60 percent of production, or nearly US$1 billion by value, was exported.

Commercial bauxite production, begun in 1987, reached 1 million tons in 1988 and was expected to reach 4.5 million tons in 1991. Much of the bauxite of Bauxita de Venezuela (Bauxiven; wholly owned by CVG) was processed at the Interamericana de Al�mina (Interalumina) plant in Puerto Ordaz. Opened in 1983, Interalumina produced 1.3 million tons of aluminum in 1988 from its plant's annual capacity of 2 million tons. Jointly owned by the CVG and a Swiss company, Alusuisse, Interalumina also controlled 50 percent of the Belgian Aleurope Aluminum Company, 40 percent of the Costa Rican firm Alunasa, and 20 percent of the United States company Wells Aluminum, thus providing it with worldwide marketing outlets.

Alcasa, the country's first aluminum processing plant, contained plants in Ciudad Guayana and Guacara in Carabobo by the 1980s. Alcasa's installed capacity, on the rise throughout the 1980s, was intended primarily for specialized overseas aluminum markets. In 1990 Alcasa had a 120,000-ton annual capacity for manufacturing primary aluminum. Alcasa's expansion plans for the 1990s foresaw a more than doubling of that capacity to as much as 300,000 tons per annum.

The country's other major smelter, the Industria Venezolana de Aluminio C.A. (Venalum), was also undergoing rapid growth in capacity. Although the CVG enjoyed majority ownership of Venalum, a consortium of Japanese industrial interests held a considerable minority stake.

The iron and steel industries represented the core of the mining sector before aluminum's rapid growth in the 1980s. Large- scale commercial mining of iron ore in Venezuela began in the early 1950s, when the P�rez Jim�nez regime granted iron ore concessions to two United States steel companies, Bethlehem Steel and the United States Steel Corporation. Huge iron reserves, located near exploitable hydroelectric resources, combined with a growing national demand for steel to set the stage for the creation of a steel mill in 1955 near the confluence of the Orinoco and Caron� rivers. With the creation of the CVG in 1960, the state gained a greater role in the country's only major steel plant, which at that time produced mainly seamless pipes for the oil industry. One of the landmarks of the government's expanding role in the economy during the 1970s was the nationalization of the Orinoco Steelworks (Sider�rgica del Orinoco--Sidor) steel mill on January 1, 1975. Funding from the Venezuelan Investment Fund (Fondo de Juversiones de Venezuela--FIV) made possible a smooth settlement with the American steel companies.

The nationalized steel industry set ambitious goals for itself, goals it ultimately failed to meet. Slower internal growth dampened local demand, and the proliferation of new steel mills in other developing nations by the late 1970s reduced international demand. As a result, plans to build two new steel complexes were postponed indefinitely by the late 1980s.

After years of delays, technical bottlenecks, and government mismanagement, Sidor's expansion made the country self-sufficient in steel by 1982. By 1985 steel exports exceeded steel imports five-fold. High initial capital investment, however, made the Venezuelan industry unprofitable, and Sidor accrued a huge debt estimated at US$5 billion to US$10 billion, a substantial portion of Venezuela's debt burden in the early 1980s. Not until 1986 did Sidor show its first profit, US$70 million, but this fell to US$26 million in 1987. In 1990 the government reportedly was considering privatizing Sidor.

Foreign competition for exports remained the major challenge to Venezuela's steel industry in the early 1990s, as steel production continued to increase, rising from 2.7 million tons in 1985 to 3.6 million tons in 1988, and internal demand remained static. Complaints about the dumping of subsidized Venezuelan steel at below-average prices impaired greater market penetration in the 1980s. The government provided subsidies to the Sidor plant, mainly through special foreign exchange rates that allowed the company to purchase imported inputs at a low rate and to pay off its debts at a high rate. In 1982 the United States Department of Commerce accused Sidor of selling its steel in the United States at a 40 percent discount. This complaint led to a 1985 Voluntary Restraint Agreement (VRA) with the United States, which set a maximum export limit of 183,000 tons of steel a year. The two governments reestablished the VRA in 1989 at 280,000 tons a year, two-thirds of which were finished steel products. Venezuela also signed a VRA with the European Economic Community in 1987 after similar dumping allegations were made.

Although the state dominated the industry, some private steel milling went on in 1990. Sivensa, the country's only private steel mill, was generally profitable. In addition, the CVG operated as a minority shareholder in a steel plant called Metalmeg, which manufactured carbon steel products for the petroleum industry. In the late 1980s, the Kobe Steel Company of Japan also converted its Minorca iron briquette plant into a direct reduction steel mill, further expanding steel production capacity.

The basis of the country's controversial steel industry was its enormous iron ore reserves. As of 1990, the government estimates of iron reserves for the state of Guayana were 2.8 billion tons of high-grade ore (80 percent iron). The CVG iron subsidiary, Ferrominera, controlled iron ore mining at numerous mines, most notably El Cerro Bol�var (southwest of Ciudad Guayana), El Pao (south of Ciudad Guayana), and San Isidro. Ferrominera's total installed annual capacity was 20 million tons in 1990. Iron production fell sharply after its peak year of 1974, but was on the rise again by the late 1980s. Iron ore production was 18.9 million tons in 1988. Ferrominera's completion of a floating transportation complex on the Orinoco in the late 1980s facilitated the industry's use of large shipping vessels, thus increasing exports and lowering costs. Exports of iron ore reached 11.7 million tons in 1987, with the United States, Europe, and Japan the leading purchasers.

Coal production also expanded rapidly during the 1980s. As with iron and bauxite, the country enjoyed large reserves of highly pure coal. The state of Zulia alone, for example, contained 900 million tons of proven coal deposits, with probable reserves as high as 2 billion tons. This made Zulia the largest underdeveloped coal field in the Americas. Besides Zulia's coal deposits, the country also possessed significant coking coal to fuel the newer steel mills, coal for thermal electricity generation, and various deposits of clean-burning "hard coal." Most coal deposits were found in the west near the border with Colombia or in the Orinoco Basin.

Three major coal mines accounted for most coal output in the late 1980s. Although not yet fully operational in 1990, the Carbones de Zulia (Carbozulia) mine was already the nation's largest. PDVSA owned roughly half of Carbozulia; a consortium of United States, Italian, and private Venezuelan companies accounted for the balance. The mine produced 822,000 tons of coal in 1988, and plans called for 6.5 million tons-per-year capacity by the mid-1990s. By contrast, the entire country produced only 62,000 tons in 1987. The United States, Italy, and Spain represented the major markets for Carbozulia's coal. The second major mine was the Minas Carb�n at Lobatera in T�chira near the Colombian border, with reserves estimated at as much as 60 million tons. The third-leading producer, in Naricual in Anzo�tegui, boasted reserves of approximately 50 million tons. In addition to these operational mines, Venezuela had several other key coal zones that remained untapped in the 1980s.

Gold, known to exist since colonial times, did not become a major commercial endeavor until the 1980s. Miners long ignored the country's gold wealth because of its oil. Furthermore, the gold deposits were found mainly in the remote border regions with Brazil and Guyana. The government, however, increasingly prized its gold reserves, which stood at 11.5 million troy ounces in 1990, or roughly 12 percent of world reserves. Gold existed in Venezuela as an ore with quartz and in alluvial deposits found naturally with diamonds. The government acquired the El Callao gold mine in the state of Bol�var in 1974 to better regulate gold prospecting and sales. The state succeeded in raising official gold production threefold from 1984 to 1989, pushing exports to over US$300 million a year. This made gold the second leading nontraditional export. Unofficial production, however, remained as high as 70 percent of total output.

After a decade of closely controlling private gold interests, the state opened up gold prospecting to foreign interests in the 1980s. In 1986 the CVG, in a joint partnership with a Bermuda- based company, formed Monarch Resources Limited to mine gold in the El Callao region. Private Venezuelan entrepreneurs also exploited the nation's gold reserves.

Venezuela also possessed varying amounts of other metals and minerals. For example, the country was a major producer of industrial diamonds, although diamond output fell steadily throughout the 1980s. The country also contained deposits of copper, nickel, zinc, lead, uranium, titanium, palladium, silicon, manganese, and chrome. Quarrying for industrial minerals such as feldspar, gypsum, hydrated lime, salt, nitrogen, phosphate rocks, gravel, barite, pyrophyllite, asbestos, bentonite, and magnesite was also common.

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