Alcan

The Globe and Mail has run three major stories about Alcan in the past few days:

Act I: “Alcan says tax makes it takeover bait” (April 27)

Act II: “B.C. town may fight Alcan” (April 28)

Act III: “$7-billion project deepens Alcan’s Gulf ties” (May 1)

Alcan is a major Canadian-based multinational that produces aluminum. Bauxite, the basic raw material, is cheap to transport, but refining it into aluminum requires huge amounts of electricity. Therefore, Alcan mines bauxite in countries where the deposits exist, but refines it in jurisdictions with cheap and plentiful electricity.

In the first story, the CEO argued that, since foreign bauxite mines sustain aluminum processing in Canada, Alcan should be able to deduct interest on debt used to finance foreign investments from its Canadian taxes. He suggested that the end of foreign-affiliate interest-deductibility would make the company vulnerable to foreign takeovers.

My initial reaction was that, if our goal is to promote aluminum processing in Canada, we should direct financial support to aluminum processing in Canada rather than to expanding global bauxite extraction. Alcan processes aluminum in BC and Quebec not because the federal government gave it a tax break on foreign bauxite mines, but because BC and Quebec gave it extremely cheap hydroelectricity. It is easy to understand why Alcan wants to keep the tax break, but this break has very little to do with processing in Canada.

The second story mentions the real reason why Alcan is cutting back aluminum processing in Canada: it is more profitable to simply resell the cheap hydroelectricity than to make aluminum with it. Of course, BC gave Alcan the electricity for the purpose of making aluminum in BC. The government and people of BC might decide that the return on selling the public power at market prices is greater than the return on giving it to Alcan for aluminum production, but then the public should retain the profits. To the extent that Alcan resells the power, the people of BC are simply giving economic rent to Alcan without getting any jobs in return.

The third story notes that Alcan is investing in a huge aluminum refinery in Saudi Arabia, which has cheap electricity from its abundant natural gas. This story contradicts the notion that Alcan’s foreign investment is aimed at mining bauxite for processing in Canada. How would Canadians benefit from allowing Alcan to deduct interest on debt used to finance processing in Saudi Arabia from its Canadian taxes? Another contradiction is between Saudi Arabia’s apparent strategy of profiting from its primary resources and/or using them to attract secondary production and Canada’s lack of any such strategy.