Century-Old Bond for Aluminum Smelters and Utilities Falls Apart RSS Feed

Century-Old Bond for Aluminum Smelters and Utilities Falls Apart

The business of making aluminum in the U.S. is collapsing — and no other industry has watched the demise as closely as the one that supplies the power used to create molten metal in giant pots.

For more than a century, America’s aluminum processors and the electricity generators grew together. Utilities sought out smelters that, in some cases, became their largest consumers. And the metal makers counted on utilities to supply an energy source that accounts for as much as a third of their costs.

Their fates were so linked that, “if the smelters were not built, then the power plants wouldn’t have gotten built,” said Lloyd O’Carroll, a Richmond, Virginia-based commodities analyst with CRU Group.

But rising exports from China have forced all but two companies — Alcoa Inc. and Century Aluminum Co. — out of the U.S. aluminum business for now. That’s dismantling the industry’s once symbiotic relationship with local electricity producers. On July 6, Century said it would start buying most of the power for its South Carolina complex from a third-party supplier instead of the local utility, after breaking ties with a utility in Kentucky. Alcoa’s plant in Washington, historically the Northwest’s biggest electricity consumer, has cut purchases from its utility in search of lower prices elsewhere.

While power suppliers have grown less dependent on smelters over the decades, losing their business only adds to the woes of a utility industry already facing weakening residential consumption and rising operational costs. Across the country, low electricity prices and mounting environmental regulation are forcing power plants capable of producing thousands of megawatts of power to retire early.

Power Squeeze

Ameren Corp., a St. Louis-based power company, will make about $29 million less this year, largely as the result of a Missouri smelter idling, according to Philip C. Adams, an analyst at Gimme Credit.
And it’s not just the utility that suffers: Ameren has asked state regulators to allow it to recover lost revenue from other ratepayers. The company also supports a change in the law to make it easier to charge residential customers more for what they use, giving the utility flexibility to offer the idled smelter a rate low enough to resume operations.

“If you are in an old Rust Belt state and have a big smelter close, somebody has to pay for that, and typically it would be the customers,” said Kit Konolige, a Bloomberg Intelligence analyst in New York.
Last year, Portland, Oregon-based Bonneville Power Administration raised wholesale power rates by an average of 7.1 percent, citing in part Alcoa’s decision to cut power purchases at its Ferndale plant. About 140 utilities across the Northwest that buy electricity from the agency will be affected, the administration said.

Metal Slump

The measures U.S. smelters have taken to cut their power bills are a testament to how desperate their situation has become. Benchmark aluminum prices have dropped about 50 percent from a peak in 2008 as demand slowed along with the global economy and Chinese producers unloaded a flood of cheap exports. The number of active U.S. smelting plants has fallen 80 percent since 2001 to just five.

“Competitive power is a critical element to help keep smelters competitive and preserve jobs,” Monica Orbe, a spokeswoman for New York-based Alcoa, said by phone.

Production Costs

Power accounts for almost a quarter of Alcoa’s costs of producing aluminum, company filings show. It takes about 17,000 kilowatt hours of electricity to make just one metric ton of aluminum, or about 55 percent more than the power use of the average American in a year.

In Kentucky, where Century stopped taking power from Big Rivers Electric Corp., the utility has been forced to idle a power plant. It gained regulatory approval to collect another $36.2 million annually from its remaining customers to make up for the shortfall. Century, a Chicago-based company backed by Glencore Plc, declined to comment.

Read full article at Bloomberg