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LATIN AMERICA Viva nacionalización! Viva expropiación!

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VENEZUELA Venezuela's announcement that members of the Bolivarian Alternative for Latin America (Alba)—Bolivia, Cuba, Nicaragua and Venezuela—will set up a joint geological and mining development council reinforces the "alternative" or "independent" regional integration process now occurring in Latin America.

The move signals another red alert to potential foreign investors, already on their guard following the past year's sudden nationalizations in Bolivia and Venezuela, including in the oil, gas, metals and telecommunications sectors.

Emerging from the inaugural meeting of the Alba mining ministries that will form the new council comes further news that another new regional mining council, Minerosur, possibly with similar premises, is planned for Mercado Común del Sur (Mercosur), the southern cone common market.

Alba, the brainchild of Venezuelan President Hugo Chávez, is touted as a socialist alternative to the so-far ill-fated Área de Libre Comercio de las Américas, the more U.S.-dominated free trade area of the Americas. Chávez finds Alba—also loosely supported by the newly socialist Ecuador—more to his taste than the conservative Andean Nations Community, which has virtually collapsed since Venezuela's dramatic withdrawal about a year ago.

Bolivia and Venezuela, which call the shots in Alba and no doubt will dominate its mining council, also have recently hitched up with Mercosur, despite their geographical position outside the region. Their entry—controversial because of the outspoken nature of their socialist-oriented governments—has dramatically politicized the rather middle-of-the-road grouping originally formed by Argentina, Brazil, Paraguay and Uruguay, with Chile joining later as an associate member.

Whether the new organizations are able to efficiently tap Latin America's growing strength in commodities, including in oil, gas and biofuels—remains doubtful, and not only because the markets continue to be dominated by Asians, Europeans and the United States. The main problem, observers note, is the re-emergence of nationalism in mining and other basic industries in several Latin American countries, scaring off global investors and causing a potential fragmentation rather than strengthening of regional selling power.

Venezuela's basic industries and mining ministry, Mibam, announced in May it is preparing the text of a new mining bill to be presented to Chávez that is expected to establish national sovereignty in all mining endeavors, possibly taking back existing concessions that are not state controlled.

It is unclear how this could affect existing foreign-controlled operations, such as Anglo American Plc's Loma de Niquel Mine and a host of Canadian gold projects.

Bolivian President Evo Morales is understood to be working on a similar initiative. The move follows the clumsy expropriation of the Vinto tin smelter from Glencore International AG in February and the oil nationalization that in May led Brazil's Petrobras SA to sell back to the Bolivian government for $112 million the two oil refineries it set up in Bolivia—the only two in the country.

In Ecuador, new president Rafael Correa has opted not to renew his country's long-standing bilateral investment treaty with the United States.

The idea of the Alba mining council is to create sustainable local growth models that add value to local raw materials, a system which works best if the industries involved are not subject to international market pricing pressures—hence Chávez's desire to simply take the companies involved off international markets, a move similar to what oil-rich Venezuela is already doing on a financial level. Chávez has announced plans to take his country out of the "imperialist mechanisms" of the World Bank and International Monetary Fund and has already pulled out of the World Bank's Ciadi, an organization designed to arbitrate and resolve disputes between governments and foreign investors.

In parallel, he is setting up the alternative Banco do Sul, or "Southern Bank," to finance his new social production companies. The new regional development bank already has the support of more middle-of-the-road countries, including Brazil and Chile.

Venezuela's steel industry is a test case for the new model. Partly subsidized by discounted iron ore, the nation's biggest steelmaker, Siderúrgica del Orinoco CA (Sidor), now needs to offer discounted prices to domestic steel users to make Chávez's model work. Sidor's controlling shareholder, Argentina's Techint Group, reluctantly acknowledged in mid-May that it was in negotiations, apparently to ward off Chávez's threat to renationalize the 5-million-tonne-per-year works which was privatized in 1997, two years before he came to office.

Sidor will need to make sure domestic demand is fully met—currently 65 percent of its sales volume is domestic—at prices expected to be some 15 to 20 percent below international levels. The lower prices are intended to encourage downstream production, which should thus grow, effectively taking the steelmaker, previously a significant exporter, off the lucrative export market.

The compensation is the possibility of participating in a shared-wealth and jobs-generation plan which could further boost Venezuela's current 8.8-percent annual economic growth rate and enjoying discounts on services offered by newly nationalized sectors, including electrical energy, telecommunications and internet provision.

Such a practice has already been the order of the day for nearly two years in Venezuela's aluminum industry. Under government decree, mixed-capital smelters Industria Venezolana de Aluminio CA and CVG Aluminio del Caroní SA sell their primary metal to downstream processors at prices 1 to 10 percent below London Metal Exchange three-month prices.

Downstream activities are indeed thriving, although the reduced smelter profits are seen to be slowing down planned smelter investments and have thrown a Glencore expansion plan into what appears to be long-term hold.


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