Smelter Back In The Fire

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An international industrial power play has put a question mark over the construction of a $2.75bn aluminium smelter in South Africa's Eastern Cape region, a project that has already had more than its fair share of delays.

The immediate future of the smelter, which is scheduled to be built at the Coega industrial development zone 20km east of the city of Port Elizabeth has been put under a cloud due to the announcement on May 7 that Alcan, the Canadian-based company committed to build the plant, has been targeted for a hostile $33bn takeover bid by rival US Alcoa.

Should the deal go through there is no guarantee that Alcoa will remain committed to Coega. If it does, it will be the second time that the smelter project has fallen foul of a takeover. Having nearly concluded talks with France's Pechiney in 2003, on committing to the development, after two years of negotiations, the whole process had to begin almost from scratch when Alcan acquired the French firm.

Work on constructing the plant was tentatively set to begin in 2008, with production due to start five years later. Initial output was set at 700,000 tonnes per annum, with the possibility of expanding this to 1m tonnes, making the smelter the largest in the world.

Following news of Alcoa's bid, the Coega Development Corporation (CDC), the state body responsible for establishing and managing the industrial zone, issued a statement on May 8 saying that talks were still underway with Alcan.

"The CDC and Alcan negotiation teams are still meeting for discussions on technical issues for the location and operation of the Coega aluminium smelter in the Coega Industrial Development Zone," the statement read.

"The CDC will watch the developments of this takeover bid with keen interest as it unfolds."

South Africa's Industrial Development Corporation (IDC), which is to have a 15% stake in the smelter when it is completed, has been trying to play down any concerns over the possible takeover of Alcan and the ramifications it could have on the project.

Gert Gouws, the IDC's chief financial officer, said the organisation had no doubts that the smelter development would go ahead.

"Naturally, if there is a new owner certain issues may be reconsidered, but based on the sound fundamentals of the project we are convinced the project will go ahead," Gouws said to the press on May 8.

Though negotiations are still continuing, some of the pieces for the project have already been put in place. In mid-February, Alcan invited four engineering companies to take part in the selection process to choose the builder of the smelting plant. The winning bid was due to be announced at the end of May but the Canadian firm has so far made no statement as to whether a decision will be made or the results released.

Moreover, last November, Alcan signed a 25-year agreement with state-owned electricity supplier Eskom to provide power to the plant at attractive rates, as a preliminary step for production.

South Africa has a lot riding on the smelter, and the last thing the government would want to see is a further delay or an outright cancellation of the project. The smelter is supposed to be the jewel in the crown of the Coega industrial zone, a development that the state has invested more than $1bn in to entice domestic and foreign companies to set up shop, with mixed success.

The smelter itself is forecast to provide employment to some 6000 workers, with a flow- on effect expected to generate as many as another 25,000 jobs, in part thanks to an agreement reached with Alcan that committed it to selling 40,000 tonnes of aluminium annually to the domestic market.

The Coega industrial zone and its associated deep-water port of Ngqura have come under fire from critics due to cost over-runs and the slow pace of take up by investors. Should the smelter be put on the back burner, more fuel will be added to the fire.

However, all is not lost for the project, even if Alcoa does gain control of Alcan. On May 8, a spokesman for the US firm said the Coega development could fit into the company's expansion plans.

While this is a long way short of a solid commitment, it does show that Alcoa has taken the South African scheme into account during its buyout deliberations. That said, even if it is to go ahead with the plant at Coega, more delays will be inevitable.

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