| NEW YORK, March 10
NEW YORK, March 10 Kentucky state lawmakers are
set to decide whether to let U.S. aluminum producer Century
Aluminum Co buy power on the open market in its bid to
save its money-losing smelter in the Bluegrass state from
With metal prices low and production costs high, U.S.
aluminum producers struggle with razor-thin margins. In its
attempt to cope, Century has taken the dramatic step of pushing
for legislation that would exempt smelters from a state law
requiring consumers to take power from only one supplier.
"We're losing money every month. What the bill would do is
get me out from under that exclusive service contract," said
Michael Early, Century's energy director, in testimony last
month before Kentucky's House Natural Resources and Environment
The bill could have bigger implications for the troubled
U.S. aluminum industry, where high-cost electricity for aging
plants has challenged many producers to seek ways to operate
more efficiently, especially as benchmark aluminum prices have
come down by more than 30 percent in less than two years.
Century's drive for the legislative change coincides with
Ormet Corp's filing for bankruptcy protection at its
Ohio aluminum facility, crippled by high costs.
Reuters data shows U.S. aluminum output has fallen by 20
percent over the past decade to 2.03 million tonnes last year,
and the number of smelters has dropped by more than 30 percent
to 10 plants over the same period.
At current aluminum prices, close to 4.3 million tonnes of
production outside of China is unprofitable, according to
Barclays base metals analyst Nick Snowdon. That is about 8
percent of global output.
The Kentucky situation may force aluminum makers who cannot
lower their production costs in the United States to shift
operations to other parts of the world, as some have done
Alcoa Inc, for example, cited high power costs when
it permanently shut two potlines at its Rockdale, Texas smelter,
and construction of its greenfield capacity is under way in the
Middle East, where power is cheaper. Aluminum capacity in the
Middle East has risen to over 3 million tonnes.
Century, majority owned by Glencore International,
wants to bypass its existing energy provider, Big Rivers
Electric Corp, and buy electricity on the spot market for its
Hawesville, Kentucky, smelter. Wholesale prices are 25 percent
lower than the fixed rate set in its 15-year power contract.
When that deal was signed in 2009, however, spot energy
prices were significantly higher. Power accounts for about 40
percent of the Kentucky plant's production costs, higher than
the industry average of 30 percent.
Without lower-priced power, the Monterey, California-based
Century said it will shut the Hawesville plant in August.
The nearby Sebree aluminum smelter, owned by Rio Tinto Alcan
, could also close unless it lowers its energy costs.
While Rio Tinto is not involved in the Kentucky legislation,
it has been watching closely from the sidelines. It uses the
same energy supplier as Century. Rio Tinto also gave notice that
it will end its power contract for its 194,000-tonne-a-year
Sebree smelter in January 2014, following a proposed hike in
Shutting the two smelters, with combined output of 440,000
tonnes of aluminum a year and representing more than a fifth of
U.S. primary production, would have ramifications beyond
Kentucky's borders. A tighter aluminum supply would push up the
metal's price, and in turn, increase costs for carmakers,
beverage companies, construction sites and many other
"I think it will be a pretty critical decision, not just for
these facilities, but for the broader outlook for broader market
fundamentals," said Barclays analyst Snowdon, who expects global
oversupply of 1.8 million tonnes.
Within Kentucky, closing Century's 244,000-tonne-per-year
Hawesville smelter will result in an estimated loss of $800
million a year in state revenue and 750 jobs.
WHOLESALE VS FIXED PRICE
Despite its closure notice, Century appears determined to
work out a viable operating plan for the Hawesville smelter. It
took its power issue to the state government after failing to
negotiate new terms that would allow it to tap the open market.
The Big Rivers utility, which gets 70 percent of its revenue
from Hawesville and Sebree, opposes the legislation, saying
long-term contracts protect companies from wild swings in spot
prices and would push up rates for its remaining customers.
Still, negotiations for power deals continue with both
Century and Rio Tinto even as Kentucky's House considers the
energy bill. Even if it passes the House, the bill would need
approvals by the state Senate and the governor's office.
Century said in its testimony that it is committed to
staying in Kentucky for the next 20 to 30 years, so much so,
that it is in talks to buy the Sebree plant, which Rio Tinto
deemed a non-core asset in late 2011.
"The board is so strong (on Kentucky) that we're in
negotiations presently to buy the neighboring plant, the Sebree
plant from Rio Tinto Alcan," John Hoerner, vice president of
North American operations for Century, said last month.
Rio Tinto Alcan's spokesman has said the company is
exploring all possible options for Sebree, but declined to
comment on Hoerner's statement.
Some North American aluminum makers have found ways to cut
costs. In Canada, many plants use cost-effective hydro power.
Other producers have contracts in which electricity prices
fluctuate with the London Metal Exchange aluminum price. At
around $1,960 a tonne, LME aluminum is well below its all-time
high of $3,380, hit in 2008, and that, in turn, brings their
energy expenses down.