US Aluminum Industry
by Alison Guerriere Ciaccio
NEW YORK -- The outlook appears grim for the U.S. aluminum industry as production slows and access to affordable power remains at the forefront of what some call a "doomed" sector where smelter closures have become the norm.
In a recent report, the Arlington, W.Va.-based Aluminum Association, said that the U.S. annual rate of primary aluminum production dropped 10.8% in August from the previous year.
Analysts attribute the large drop to aluminum giant Alcoa Inc (AA) curtailing the Eastalco smelter in Frederick, Md. and the closure of a potline at Century Aluminum Co.'s (CENX) Ravenswood, W.Va. unit, due to labor negotiations, while others contend that the drop is just a trend that will remain in place.
"We are not likely to see consistent, large drops in production like that but we are certainly not going to see an increase in those figures," said a U.S.-based aluminum trader.
One market analyst said while the main issues facing the U.S. aluminum industry are power prices and the availability of power, he contends that in the near term, significant changes will not likely be seen.
He said, however, over the longer term as power contracts expire, the market will remain vulnerable.
"We will not likely seen idled potlines restart," the analyst said.
In November 2005, Alcoa said it would suspend production at its Eastalco operation due to high power costs.
"Unfortunately we have not been able to secure a competitive power arrangement to date so we will be forced to curtail the plant," said Geoffrey Cromer, vice president operations of U.S. primary metals, at the time of the closure.
Alcoa spokesman Kevin Lowery told Dow Jones Newswires Thursday the company continues to work with local government authorities to explore power options for the facility.
"But it doesn't happen overnight," Lowery said.
Struggle For Power Contracts Ongoing
This battle to secure power contracts for high energy-consuming smelters is not likely to end for U.S. aluminum companies.
"As of right now we are doomed," said Jim Southwood, president of analytical firm Commodity Metals Management Co. "The demand from the population is growing and we are not seeing a growth in capacity."
The Pacific Northwest may be the most visible area of the U.S. where what was once considered some of the cheapest power for aluminum smelters is turning into a battle with a growing population amid soaring costs.
The Bonneville Power Administration, which provides power to the Northwest, is considering a move to end its long-term business with several aluminum companies after 2011 as power prices rise and energy is being consumed at a wildly fast pace.
"We provide 40% of power consumed in the Northwest and that includes Washington, Oregon, Idaho and Western Montana," said Mike Hansen, a BPA spokesman. "But we are in a situation now that we have just about enough power to serve all of our customers and as we move forward that balance will be tipped toward not having enough power to meet demand."
The BPA's customers includes about 120 utilities. They also provide a surplus of power to brokers and others throughout the West Coast.
If the BPA could not meet all of its customers' needs it would have to go to the market to buy power, a costly proposition. The BPA said these costs will then be passed onto its customers.
Alcoa, which will begin a new five-year contract with the BPA to power its Intalco smelter in Ferndale, Wash., in October, said singling out the aluminum industry is unfair.
"We will utilize BPA power but while we think it's great to secure power for five years we view this as a bridge option to buy power just as other industries in the region do," said Lowery.
The BPA along with Alcoa, Columbia Falls Aluminum Co. and Golden Northwest Aluminum Inc. agreed to a five-year power contract, which will expire on Sept. 30, 2011.
In that contract, instead of providing direct power to the smelters, the BPA said it would provide a financial benefit to the companies to go to the market and find the power.
"They will use the finance benefit to buy down the cost of power where they can afford to operate," said Hansen.
The three companies will take 560 average megawatts of power to divide among each company, according to previous usage.
The value of the power is estimated at about $59 million. Hansen said Alcoa will get about 320 megawatts or the equivalent of $33 million.
"The (aluminum companies) don't like it because market prices could rise and there is more uncertainty with that," said Hansen.
The BPA held a meeting Sept. 8 calling on all aluminum companies as well as its utilities to come forward with their thoughts on the post-2011 era and possible power crunch.
Alcoa and other companies noted during the meeting they have been good business partners with the BPA for some 65 years and have provided jobs and flexibility to the BPA.
Lack Of Government Energy Policy Blamed
While Alcoa and others said that they deserve to be served at good, competitive prices so they can continue to operate, utilities serviced by the BPA were on other side of the issue.
"The several utilities and utility associations were saying that the BPA has no legal obligation to serve (aluminum companies) post 2011," said Hansen. "Power prices could go up (if the aluminum companies still are served power) and that could end up costing other people their jobs."
The BPA said it is open to public comment until Sept. 29. After that it will draft a plan and release its decision on the post-2011 issue in January.
"We know what Alcoa is saying and we consider that but their crystal ball is no better than ours (in regards to) the price of energy and aluminum," said Hansen.
Southwood from Commodity Metals Management said these sorts of issues are leading to the "crowding out" of the basic industry.
"People are unwilling to build additional power plants. We need a new solution to get rid of nuclear waste from power plants and the spent fuel," he said. "But the root of it all is government policy."
Southwood contended the lack of a government energy policy to promote the development of electrical generator capacity is fueling the power issue.
"There is demand as the population grows and it crowds out part of the business community and that happens to be disproportionately focused on aluminum smelters," he said.
Southwood added that aluminum smelters use a large block of electric energy and don't employ large amounts of people so the industry is "politically disadvantaged."
The thoughts of "not in my backyard" are also a main thread behind the reason to not build more power plants, he said.
Building power plants next to aluminum smelters in the U.S. is not feasible.
"You need a dam or a nuclear plant or a flair gas-fed system and many of those carry environmental concerns," Southwood said. "And it will need major capital to do."
Plants Seek Political Help To Avoid Shutdowns
In another part of the country, aluminum maker Ormet Corp. is still attempting to find a power contract so it can restart its idled Hannibal reduction facility in southeast Ohio.
In mid-July union workers at the operation ended a year-and-a-half strike but the company said it has been trying to secure a power contract since 2005 with American Electric Power.
"It is a very lengthy process and we knew when we started that it would take a long time, so in the meantime we are talking with other parties like brokers and other energy suppliers" to get a deal, said Linda Regelman, Ormet spokeswoman.
The company has also enlisted the help of politicians to get things moving along, she said.
"Ormet is doing all they can," Regelman said, adding the company had hoped to restart the potlines at the Hannibal facility by the beginning of 2007. But there is no guarantee it will happen, she added.
If the company isn't able to obtain power it will have to shut down, Regelman said, but she added the company doesn't think it will come to that.
"We don't think that is likely but we don't know how long this process will take," she said.
Ormet's Hannibal reduction plant is the fourth-largest aluminum smelter in the U.S., the company said.
Another smelter at high risk is said to be Century Aluminum's plant in Ravenswood.
"It's a high-cost smelter but they have a power contract for several years so as long as the contract is OK and aluminum prices are high it will continue to run," said an analyst.
But he added if aluminum prices pull back to around 70 cents to 80 cents per pound, then depending on the power rate the smelter could shut down on a cyclical basis or even permanently.
In general, companies like Alcoa are buying capacity elsewhere, where power is cheaper, like in Iceland and Trinidad, said Charles Bradford, metals analyst at Solei Securities
"They are building capacity in Brazil and other places," said Bradford. "The U.S. is not a good place to make aluminum."
In the Pacific Northwest alone there are over 800,000 tons of aluminum production currently idled.
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