Steel Crazy After All These Years

The text on the 5 de Julio metrocable station mural makes more sense than this guy...
The text on the 5 de Julio metrocable station mural makes more sense than this guy…

This must really be – and I know I seem to write this often, but bear with me – one of the weirdest things I’ve read about Venezuela in a long time:

President Maduro has announced that CVG, the giant state-owned corruption-cesspool-cum-mining-and-metalmaking-conglomerate, will henceforth demand “fair prices” for its aluminum and steel exports, meaning prices above the international market price.

“It is the state that sets the price of these products that will be sold, it’s not some mafia … no individual is going to come here and tell us the value of a product that belongs to all Venezuelans,” Industry Minister Ricardo Menendez said last week during the launch of the new system. […]

Though it traditionally sold those metals using the benchmark prices of the London Metals Exchange (LME) – the world’s top market for non-ferrous metals options and contracts – it also offered discounts off the reference prices.

With the new mechanism, Venezuelan is now selling its metals well above the international price, according to mining industry workers, though it is not immediately evident how the companies are establishing prices.

The industry ministry did not respond to requests for clarification.

Let’s just lay this out explicitly: CVG’s crack “sovereign marketing” team is now presumably going out and informing metal buyers from New York and Madrid to Guandong and Jakarta, that Venezuela demands to be paid $700 for steel  those buyers can just as easily, just as straightforwardly, and just as quickly buy for $150 from an almost infinite number of other suppliers worldwide because, y’know, $700 is the “sovereign”, “fair” price…

See, that doesn’t even sound like “bad policy” to me. It’s more just plain weird, in a you-d0n’t-actually-understand-how-this-works-at-all-do-you kinda way. It suggests a policy-making process that’s gone beyond dysfunctional to become the bureaucratic version of psychotic break with reality. The government is determined to let it be known that it has no idea how the sane world actually works. (BTW: if, after this, you’re still a Venezuelan bondholder, let it never be said you weren’t warned.)

Our leadership seems so far gone in its koolaid drinking ways, so steeped in nonsense rhetoric, it can’t grasp that it can’t coerce the rest-of-the-world into acting against its self interest the way it can coerce people stuck within their little economic sandbox. They really can’t see that there’s no reason for anyone outside Venezuela to pay $700 for $150 worth of steel. It’s as though they’ve concluded that the fact that it costs SIDOR $700 to make steel that other companies worldwide routinely sell at a profit for $150 somehow reflects badly not on SIDOR, but on the rest of the world! 

Maybe it isn’t so mysterious, though…I mean, one way to describe chavista economic policy-making is that it’s premised on the expectation that people will act against their economic self-interest in a stable way over time. That they’ll sell rice that costs them 10 to produce for 7, and will do so willingly and steadily forever. That they’ll use a dollar to import Bs.6 worth of stuff, when they can just as easily use it to obtain Bs.30. That they’ll be pendejos, reliably, steadily, forever.

Once you’ve created an economic policy regime premised on the looney-tunes thought that people can be forced to act against their own interests forever inside Venezuela, it’s maybe not such a strange thought to you that they’ll do the same abroad. And so, CVG is launching the ultimate experiment in revolutionary marketing on a global scale: the 2-for-the-price-of-3 Sale.

Good luck with that!

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  1. You got it! It is all about the “inside”/”abroad” thing. The only ones buying the fair, inflated price will be Venezuelans themselves, including other state enterprises. That will certainly contribute to the industrialization ‘efforts’ and diversification plans.

  2. These people belong in an asylum… But anyway, does this mean they don’t make a profit at market prices? Looking at the gross inefficiency of anything the Venezuelan state is involved in, I could easily imagine that being the case.

  3. Yet another insane idea of guys completely disconnected with the World.
    They didn’t even try to come up with something like ‘we are creating a kind of meta-related OPEC’, which anyway would not be possible at all.
    It would be nice to plot now 1) the average world price of the top 2, 3 metals we used to export
    and 2) the amount of exported metals from Venezuela from now on.
    After plotting that, one would print that on large sheets…and order Maduro, in a straight jacket to swallow them all in front of the cameras.

      • Indeed. If I were a journalist reporting about Venezuela I would have a kind of macro or template including something like
        “The ______ ministry did not respond to requests for clarification”

  4. You are assuming the purpose of this decree is noble. It is not. It’s purpose is to push into bankruptcy all the enterprises that buy metal from the state and sell it overseas. THAT is the true goal here. The state can survive without selling metal a LONG time. Not the enterprises, some of which are not yet in the hands of the boliburgeousie. They will be soon, their owners will have to sell them for nothing.

    • The measure is still nonsensical ” The state can survive without selling metal a LONG time. ” That is only in the logic or lack thereof of a magical petrostate, where the state can own a Company and spends money manufacturing and a put a price on it that no one will pay. To manufacture and price a product with the deliberate intention that no one buys it is the equivalent of flushing money down the toilet.

  5. Here’s a thought. Do you remember when Caracas Chronicles posted a story about Jorge Arreaza being invited/forced to visit a Chinese ‘Special Economic Zone’ while on his recent trip to China? It appeared at the time that the Chinese were grabbing him by the scruff-of-the-neck and forcing him to observe how economics in the real world functions. ‘See! this is how WE did it!” Wow. Apparently he wasn’t paying attention on that day, or was too busy memorizing his speech to the Chinese Finance Minister later that day on ‘all the wonderful things we are going to do with that NEW loan’ you’re going to give us. Just imagine what the Chinese must be thinking with this latest bizarro statement coming out of Caracas? You want,…how much?

  6. Are you sure that those $700 have to be paid in USD instead of in VEF at official rate?
    $700 x 6.3 “=” Bs 4,410 = $126 (@ 35) and magically someone will make a beautiful arbitrage profit of 24$ per MT

  7. Seems to me there’ll soon be a whole new Pabellon Criollo featuring platefuls of acero mechado and tajadas de acero.

  8. the only thing that the article leaves unclear is whether Venezuela has enough weight in metal production worldwide for global prices to be impacted by the country’s decision to essentially leave the market altogether – and it doesn’t seem likely, at least judging by this data where South America as a whole is attributed ~4% of aluminum production worldwide >

  9. Right! let the world pay off for this regime’s inefficiency producing anything while bankrupting private businesses. BTW great article, nicely written..

  10. The govt has just indicted the former bosses of some CVG companies for corruption, presumably involving the international sale of state produced metal products at below market price in return for kick backs . Now they are anxious to repair their damaged image by making a spectacle of a new policy whereby they will on their own determine the price of those products , at such price as they deem ‘fair’ . Of course markets dont work that way, prices are set by the market , i.e by rules of supply and demand and not unilaterally by suppliers or purchasers alone.

    Very likely the new Minister doesnt know better and is under the illusion that because the govt is all powerful inside the country it can dictate prices to the worlds market . Thats pure B.S.

    Pdvsa has known this for decades , the Minister ought to have done a ‘reality check’ before declaring something so blantantly silly !! Also there is no one price for these products , they will vary depending on their specifications , time of shipment , destination , intended use etc etc .

  11. what really bugs me is that maduro could happily say that he is in favor of this thing and in the same speech that he is against the speculative conspiracy of “far-right” businesses

  12. Do the CVG companies even produce enough metals to export? Aren’t they struggling to meet even the demands of the Venezuelan market?

    • Absent access to official figures , I understand from personal contacts that Sidor and Venalum made no meaningful exports in 2012 , Iron ore is still being exported at much reduced volumes . Understand that some briquette exports are still being made . There are various factors influencing this situation . The devastating impact of power cuts made to CVG industries to allow for enough electricity to reach the cities and avoid urban protests , the rising silt in the orinoco channel severely restricting the movement of large vessels for long periods each year, the mismanagement of the industries by incompetent appointees, the drop in the production of local bauxite and iron ore deposits used as raw materials , labour problems of all kinds , the preference given to the supply of govt programs and local consumption at regulated prices . CVG is not currently self supporting , much of its costs are being covered by Pdvsa funding , including it is rumoured the bulk of its payroll costs . .

  13. Francisco,

    I enjoy reading both CC and Devil’s Excrement. I find the topics raised here very interesting and like how you and other bloggers state your arguments. However, I do feel the obligation to tell you and the hundred others prophets of apocalypse and forecasters of Venezuela/PDVSA default one thing: Zapatero a sus zapatos!

    You know, I don’t have a problem to discuss this topic in further detail with people who clearly DO NOT understand sovereign risks and financial markets. However, I find very irritating the fact that you, and so do many others, keep forecasting Venezuela’s default until the eternity. If you plan to keep doing this, I propose that we include you in the database, so we can actually keep track of your record (Hint: It will probably not look good given that you’ve been mistaken all along, but hey, who knows? Past performance is not indicative of future performance so you might have a small chance).

    But you know, even a broken watch is right twice a day. Which leads me to the following: rule #1 of pundits and forecasting: the forecast needs to have a date. Not that I agree with forecasting, in fact I find it rather useless, but that’s a separate discussion altogether. However, if you are going to play that game you might as well play by the rules. Makes sense right?

    Now on the actual reason I find your prophet of doom attitude so annoying. Let’s start by the basic rule of 72. Basically, if you divide 72 by the coupon rate of a bond, this will tell you roughly how much time it takes to duplicate an investment. Let’s just work with easy numbers and say I’ve been obtaining coupons of 10% on my Venezuela/PDVSA holdings for the past 14 years. What do we obtain? Surprise surprise! My investment more than tripled over the past 14 years! And I am not even taking into account capital gains, which have been well, juicy. All this while you and the other “especialistas de turno” were predicting that bondholders were going to get screwed by the Government. By the way, I am not an isolated case, many other people who have been smart enough to separate facts from media frenzy have been able to capitalise on the opportunity.

    Let me tell you something, I don’t like the Government per se, but they have respected their obligations to bondholders. Of course, that has been at the expense of Venezuelans and their country, but once again, that is a different discussion. We can even go deeper on why do I think that the Govt. will keep paying the debt holders. I am more than happy to do so.

    One of the most annoying things about Venezuelans, both Chavistas and Opposition, is that they just LOVE to be the “especialista de turno”. Electric crisis? Bring on the expert. Foreign Default? Yeah we know all about it! Toilet paper Crisis? Sure, we have the world’s top analyst on toilet paper. One small caveat though, somehow it seems that the experts are always the same 10 guys and they seem to know about E-V-E-R-Y-T-H-I-N-G.

    Bottom line: even if the Government defaults today, I would have more than recovered my investment and readjusted my risk exposure accordingly. So have many other people. So spare the doom and gloom for others.

    • Venny : I myself are wary of getting in the forecast business , too tricky , to susceptible to variables , but you are a knowledgefull fellow , what is the current credit rating of Venezuelan government bonds ?? is that rating plausible or off mark ??, in your informed opinion what has to happen for Venezuela to default ?? are we better off now than we were a year ago ?, two years ago ?. I´m not questioning your opinion just wanting to understand what can happen from what you know of Venezuela’s current finances and its likely denoument ?? having an outside unbiased view may give you an advantage. I´m not interested in how well you do ( I believe you when you say that you ve protected yourself and are way ahead in the game even if there is a default) but on what can happen to this country if the financial situation continues to deteriorate.

      • Blass:

        Venezuela’s and PDVSA’s current credit rating is defined as:

        “More vulnerable to adverse business, financial and
        economic conditions but currently has the capacity to meet
        financial commitments”

        There has been no downgrade on financial conditions, it is on negative watch due to possible worsening political conditions.

        What this means is if oil goes down, there could be problems, if debt goes up, there could be problems, if politics gets tricky, there could be problems.

        So far, since April, I would say all three have improved.

        • Thanks Miguel. !! any idea of how our credit rating compares to that of other countries , such as Mexico , or Colombia or Chile or Indonesia ??

          • One step worse than Indonesia, which is BB and two below the other three, which are BBB. With a few steps, Venezuela could back up to BB, mostly transparency about reserves.

          • I would concur with the recent improvement. Whether those seeds bear fruit however…

            I add just a small bit, in no particular order.

            Good guys:
            The regime seems to be moving towards a more productive cash cow. (emphasis on seems).
            Oil prices remain high.
            History of maintaining current payments.
            What looks to be more private investment, through the auspices of the government, in the oil sector.
            Possible retrenchment of oil deals/external trade-in-kind aid/cash

            Bad guys:
            Transparency. (Questions of importance such as FCF go unanswered or are unknown)
            Instability within the government/PSUV.
            Burn rate is extremely high/cash demands from the government for projects/expenditures.
            Unstable internal economic environment/lack of effective monetary/fiscal policies.
            Sidetur, which was ably covered by Mr. Octavio.
            Systemic economic instability…the global party isn’t so hot; China is slowing, USA is wobbly.
            Expensive maintenance needs within PDVSA due to lack of investment
            Quasi-reluctant PPPs. (See adventures with/in China, Russia, Chevron.)

            It would only take a small shift in a couple of these factors to create real serious problems for PDVSA and with it, the government. What would happen if oil dropps 15-20% over the next year and there’s another Amuay? The US returns to recession and China slows to a crawl while at the same time, there are more internal demands for cash due to declining terms of trade (panem et circenses after all).

            When push comes to shove, I think they will Sidetur the bondholders with their own usual justifications…regardless of how insanely irrational they seem. After all, a Manhattan bank is a lot less scary when the peasants are battering at the door with torches and pitchforks. It simply is a matter of time until something, regardless of what it is, kicks the whole house of cards into a mess.

      • I’m sure many Cubans alive today have been foreseeing the imminent collapse of that economy for half a century, and I very much hope all the regulars of this blog are still around in 2040.

    • Well, congratulations on turning a fat buck as you’ve bankrolled our keptocrats for the last 14 years. Glad you’re real proud of that. Your medal for good citizenship should be coming through the mail any time now…

      Nonetheless, you miss the point I was trying to make: the basic reason *now* to believe Venezuela will continue to service its debt going forward is some version of “no government is crazy enough/insensitive-to-its-own-self-interest enough to stop paying a bond it has the ability to pay.” To my mind, items like this, together with the Eudomar Tovar appointment, put a very fat question-mark over that equation. These people are stark-raving bonkers…

      • “Well, congratulations on turning a fat buck as you’ve bankrolled our keptocrats for the last 14 years. ”

        How is this different than normal capitalism?

    • Had I invested in yellow (not black, as you, in effect, supposedly did) gold some 14 years ago, I would be doing all right today. But, that was then, and now is now. Even a Venny, if extraordinarily lucky enough to grab a 10-bagger, can be, like a stopped watch, right once in awhile in his lifetime….

  14. This level of stupidity is baffling, even for this Government. Things have gone so far that I could be marginally relieved (well, not really) to find some scam or ulterior motive behind this issue, because otherwise such measure is (economically speaking) hilariously suicidal. I think 21st Century Socialism has left behind using obsolete ideology for its policy making process and just went straight to childish wishful thinking… The Venezuela’s Government is pretty much the Zapp Brannigan of authoritarian regimes.

    • “Things have gone so far that I could be marginally relieved (well, not really) to find some scam or ulterior motive behind this issue…”

      Right! When I read the guy above saying this was to drive the intermediary out of business I was *relieved*! My first reaction was “Oh, so they’re NOT totally insane then, good!” – how fucked up is *that*?

      • How could you believe it was serious? or permanent? I mean the government thinks it can do a lot of things but they are well aware of their international limitations. Personally I just think it is a temporary tool to limit exports maybe there is a contract clause they can wiggle with? renegotiate? the Al, Steel, and Fe industry have yet to recover from the disaster of the 2010 electricity rationing.

        As opposed to Chavez who was content with the black hole that is the CVG, Maduro’s people are paying more attention to Guyana, lots more.

      • I sincerely do not know what is worse right now: bad will and totally insane or bad will and just very insane with a touch of cunning.

  15. Last year public sector non oil exports amounted to some 1500 MK US$, if my recollection of BCV figures is right , this represents only a fraction of the total Venezuelan Oil exports for last year . I figure CVG is currently more a burden than a contributor to the govts finances so the impact of CVG’s decisions , no matter how crazy or misguided is bound to be irrelevant seeing the picture as a whole .

    The real problem is that Pdvsa’s oil production both of products and crude is going down and will continue to go down if some quick and effective measures are not taken right away , to the extent such production losses continue unabated the govt will find itself without sufficient funds to continue with those programs and expenses it needs to prop up its national and international popularity as a regime and possibly to meet its acccumulated debt.

    Such measures however require the inyection of loads of money into Pdvsa oil operations which the govt doesnt have and can only get by committing to pay its creditors or foreign investors with future production .

    This means that even if the hemorraghing from production losses is staunched Pdvsa needs to be succesful at maintaining its dropping production and if possible increasing it but the money coming from such new production will go not to the govt coffers but to pay the loans which they will have to assumme in order to maintain or increase production which places the govt in the vise of a catch 22 situation .

    The only way forward for the govt is to handle the political challenge posed by the strenghtened oppo by using ‘knock out’ blow tactics before its lack of funds starts affecting its eroding popular support , concentrate all its available resources in keeping its key constituency happy and hope that at some point in time the money starts flowing again to its coffers so that the old programs can be restored .

    Getting the money to recover Pdvsa dropping production paradoxically will force it to enter into the kind of deals with private and foreign capital that they so ferociously condemned in the past , albeit only legally cosmetized to hide their similarity .

    The above is all probably off topic , but somehow related to the subject ot CVG’s crazy stance that it will dictate its prices to the market !!

    • That is what they are doing with Chevron, Sinopec and the 1,000 oil wells. Ramirez looking for more deals, which are no more than following the Giusti model. The only difference is that in the Giusti model, the debt was in the projects, now it is all PDVSA’s.

      • Another difference ( not the only one) is that payment of the loans is done by mortgaging the income from future production so that such income goes direct to third party accounts and only partially to the projects or Pdvsa .

          • In the old days this kind of deal only affected a minor part of the production , now it applies to much bigger share of the pie ., Gone are the days when Pdvsa could handle most of the production on its own , with its own funds , without mortgaging a large percentage of its income and the oil could be sold to 1st class paying customers , with no discounts !! When Pdvsa didnt need outside help to operate its most productive fields or dig new wells !! when the installations and fields for the most part were still in good shape and running . Im afraid it is much worse now except for the prices but even they may not be enough to make up for the other things.!!


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