Highlights:
– Chavez nationalizes cement industry; seized-producer Cemex after compensation talks fail
– Chavez justifies decision in the name of “national development”
– International arbitration is likely to continue in mid-term, however Cemex will likely concede to government pressure in long-term
The recent takeover of cement-producer Cemex is the latest move for Venezuelan President Hugo Chavez’s continuing trend of nationalization. The action garnered outrage from Chavez’s political opposition, as well as uncertainty from potential foreign investors. Cemex spokesmen vowed to fight the takeover through arbitration in the coming months, but the company will likely be dominated by Caracas’ wishes in the mid to long-term.
While Cemex may put up a symbolic fight against Chavez’s actions, Cemex’s Venezuelan holdings represent too small of a percentage of its overall global profits for the company to likely bother with confrontation with Venezuela into the long-term.
Stalled Talks Lead to Takeover
President Chavez initially announced the upcoming nationalization of the cement industry in April 2008. Foreign corporations responsible for cement production within Venezuela agreed to sell holdings to the government and remain minority stakeholders. As such, the government compensated Lafarge of France and Switzerland’s Itolam Ltd. for US$267 million and US$552 million respectively.
However, negotiations with Cemex, a Mexican-owned company responsible for the production of 50 percent of Venezuelan cement, stalled over the amount Venezuela would be willing to pay for compensation. Cemex currently controls three cement plants, 30 smaller concrete production facilities, and a shipping terminal, employing approximately 3,000 workers. While the company represents an influential force within Venezuela, its sales within the country only account for two percent of its US$217 billion annual revenue worldwide (2007 figures).
After the halting of negotiations and the end of a 60-day deadline set by President Chavez to impose control, he ordered National Guard troops to physically take over Cemex’s facilities. At midnight on August 20, 2008, national guardsmen and government officials moved into Cemex’s three cement plants. While officials immediately occupied the facilities, the takeover was seen as more of symbolic measure and total transition of control will not be completed until December 31, 2008. Cemex announced on August 20, 2008 that it would seek arbitration in the case from the World Bank’s International Center for the Settlement of Investment Disputes in the near-term.
Chavez’s Justification
Chavez has routinely criticized private sector cement producers for charging too high of prices and being stingy with supplies. He argues this has “hampered the government effort” to build affordable housing, an issue his opposition routinely points to as a failure of his administration thus far. The recent nationalization, Chavez states, is in the “name of national development,” and that Venezuelan interest should prevail over that of private entities.
The nationalization is another move in Chavez’s strategy to impose state control over various sectors of the economy and channel oil wealth into social programs. Supporters applauded Chavez’s decision, stating it will reduce poverty and bolster health and literacy initiatives, while his detractors cite already apparent shortcomings in translating profits from nationalized industries into wealth for citizens.
Outlook
The nationalization move will likely deteriorate an already strained relationships with Mexico in the near to mid-term. While Cemex is not a Mexican-state owned company, Mexican officials, including the ambassador to Venezuela, have already expressed anger at Chavez’s decision. Mexico’s ambassador stated that while his government respects Venezuela’s sovereignty to make this decision, Mexico believes it is discriminating treatment of Cemex.
Venezuelan-Mexican relations remain somewhat tense following an exchange at the 2007 World Economic Forum in Switzerland between the countries’ leaders. Mexican President Felipe Calderon stated that Venezuela was “moving toward the past” with its “harmful” socialist policies. Chavez retorted that Calderon is a “lap dog” of the United States, and that Calderon’s statements could jeopardize Mexico’s future by making it “subordinate to imperialism.” The latest incident will likely keep relations strained in the mid-term.
The nationalization decision also has repercussions for Venezuela’s economic outlook. Any potential profits from the nationalization will likely not be felt for some time after the transition of power is complete. Also, the potential for additional nationalizations in the future will likely lead potential foreign direct investors to remain wary of initiating new ventures, negatively impacting Venezuela’s economic future in the long-term.
