Electricity rates have served as both the linchpin and the scapegoat for the survival of domestic aluminum production facilities in recent years.
Aluminum smelters have closed down or threatened to due to power rates they deem too high and the specter of subsidized foreign production and low aluminum prices worldwide. While discounted rates have sometimes served as a lifeline to keep the operations afloat, they have also stood as a roadblock to survival.
Alcoa Inc. received a lifeline last November and backed off its decision to close its Massena West smelter in upstate New York after the New York Power Authority (NYPA) provided the company with an additional $30 million in subsidies through 2019 (amm.com, Nov. 24).
The result of a lack of subsidies was evident less than two months later, when Franklin, Tenn.-based Noranda Aluminum Holding Corp. announced that it was closing its New Madrid, Mo., smelter in March. Rising electrical costs were blamed for the closure by one Missouri state senator (amm.com, Jan. 15).
“Without a competitive power rate, there can be no business case to restart the smelter,” Noranda president and chief executive officer Layle K. “Kip” Smith said during testimony in the Missouri State Senate in March. “Despite the small reduction in our power rate we received at the PSC (Public Service Commission) last year, Noranda’s current rate is now the highest of all remaining U.S. smelters that haven’t announced closure.”
In April 2015, the Missouri PSC voted to reduce the New Madrid smelter's power rate to $36 per megawatt hour, plus a $2 fuel charge. Combined, this would equal a rate of 3.8 cents per kilowatt hour—38.6 percent lower than Missouri’s 2015 average rate of 6.19 cents per kWh, according to data compiled by AMM from the U.S. Energy Information Administration (amm.com, April 30).
“It’s not that (the United States has) the most expensive energy costs, but where these smelters are going are hydro and thermal. ... There’s no question that our price of electricity is getting higher than it is elsewhere,” Henry Fayne, an independent consultant who works with smelters to negotiate power deals, told AMM.
“That’s been a trend in our industry for the past 20 years,” Matt Aboud, vice president of sales and marketing at Hydro Aluminum Metals USA in Baltimore and a member of the board of directors of the Aluminum Association, said.
“Countries with abundant ‘stranded’ energy” are the ones that can attract new industry with their nominal power costs, he said. These countries include areas in the Middle East, Iceland, India and China, each of which has huge reserves of a particular energy source (China has coal, for example) that allow them to charge little for converting these resources to electrical power.
Meanwhile, of the smelters remaining in the United States, many are still reliant on power off the grid, sourced from public utilities that must consider the needs of citizens and other businesses they service. Aluminum smelters can use up to 10 percent of a power provider's total supply. The New Madrid smelter used more power than provider Ameren Missouri’s next 71 largest-consuming customers.
The rates that these companies pay are far from trivial to their operations. “Globally, competitive electricity rates are the basis for a business plan,” Noranda president of primary aluminum and vice president of manufacturing Mike Griffin told the Missouri State Senate.
Electricity rates constitute 30 to 40 percent of a smelter’s cost structure, according to Griffin, who was working for Hannibal, Ohio-based Ormet Corp. when it cited high power costs as a reason for it seeking Chapter 11 bankruptcy protection in 2013 (amm.com, Feb. 26, 2013).
“If you are at a disadvantage for approximately 40 percent of your cost structure, all the benchmark operating practices and efficiencies cannot compensate for a fundamental gap,” he said.
“In general, this is a trend that will not reverse itself,” Aboud said of the migration of smelters out of North America to energy-abundant countries.
But is it that bad?
In Noranda's case, not all parties agreed that the company was simply paying too high a price for its electricity.
“Our electric rates are some of the lowest in the country,” according to Warren Wood, vice president of external affairs and communications at Ameren Missouri. “They’re low enough to attract new industry and allow industry to expand.”
Missouri’s rate is slightly lower than the U.S. industrial average of 6.85 cents per kWh hour. It ranks as the 14th-lowest power rate in the United States, with Washington State boasting the lowest industrial rate, an average of 4.42 cents per kWh in 2015.
However, while Noranda’s rate of 3.8 cents per kWh is low, the math still doesn't allow much room for smelters to survive, much less thrive, in market conditions like today’s, where aluminum prices on the London Metal Exchange have been less than $1,500 per tonne (68 cents per pound).
“We’re depending on having an LME north of $1,850 (per tonne) to keep things operating,” Aboud said of the U.S. aluminum industry.
The LME’s three-month contract closed the official session at $1,501 per tonne (68.1 cents per pound) March 31, down 16.1 percent from the year-earlier close of $1,790 per tonne (81.2 cents per pound).
With LME prices so low, aluminum producers that have so far survived have optimized their operations to keep afloat, even if the LME is well below $1,850 per tonne (83.9 cents per pound). Century Aluminum Co.’s U.S. facilities have been optimized to break even with an LME price of $1,450 per tonne (65.8 cents per pound), president and chief executive officer Michael Bless told investors during a Feb. 18 earnings call (amm.com, Feb. 19).
Even so, power rates have to go below 3 cents per kWh to be competitive with what other countries can offer, Fayne said. Such low rates are not possible when utility companies have to consider local residents' tolerance for absorbing the discounts.
The people vs. the aluminum industry
The issue of residents absorbing the discounts needed to keep aluminum smelters open was a central issue in the dispute between Century Aluminum’s Mount Holly smelter in Goose Creek, S.C., and its power provider, Santee Cooper Power.
Santee Cooper had said in November that any power deal would have to be fair for all sides (amm.com, Nov. 30), with the plant operating at half capacity after the two reached a temporary deal to keep the plant open in December (amm.com, Dec. 18).
The tolerance of residents for higher electricity rates to support smelters is also related to concerns about what will happen if these smelters, given the discounted rate, continue to stay open.
“The best example is when (Century Aluminum's) Ravenswood (smelter in West Virginia) was operating,” according to Fayne. “They convinced the commission to give them a discounted rate, which worked reasonable until the price of aluminum sank and they shut down.”
The Ravenswood smelter was idled in February 2009, which was attributed to both plummeting aluminum prices and slumping demand (amm.com, Dec. 17, 2008). After years of trying to renegotiate a power deal, Century permanently closed Ravenswood in 2015 (amm.com, July 28).
Chicago-based Century Aluminum declined to comment for this story.
“It’s all about jobs,” Fayne said. “There has to be at least some basis to say, ‘If I do this, it’s going to survive.’”
The bureaucratic dance
The penalty for shutting down operations entirely often is also prohibitive for both the aluminum producer and the power provider. Without the New Madrid smelter, Ameren Missouri customers will have to absorb a $42-million loss in revenue from the smelter that no longer pays for power, Smith told the state senate.
Meanwhile, the expense to shut down a smelter’s potlines is also prohibitive, enough so that it might sometimes be a better business move to keep an unprofitable smelter open than to shut it down.
“The fact that smelters are open today ... they’ll lose less money (staying open) then to close (them),” Aboud said, adding that a smelter hovering around breakeven is in a position where it might as well remain open.
Additionally, aluminum producers find themselves in a situation where a number of factors are preventing them from getting an optimal power rate, including an increasing population of power-consuming citizens, aging grids in the United States, a lack of power sources like nuclear power and issues with fracking.
Furthermore, there is an entire bureaucracy that aluminum producers have to go through to land a competitive power rate, which limits the options metal companies have.
“So much of what is able to be done, and the rates that can be approved, depends on the power authority and what its mission is,” one aluminum supplier source said.
“Most of the states I work with, it’s a lengthy process reaching a deal. ... At least if you have a long-term deal, you don’t have to go back into a regulatory process,” Fayne said.
“Everything’s gone short-term,” Aboud agreed, noting that regulatory bodies are much more likely to reach a two-year deal than a 10-year deal.
“The fundamentals are such that there’s very little hope of a new project going online ... unless a company has the electricity,” he added.
“It has come to a point where smelters require subsidies to be competitive,” Fayne said. “Maybe more (subsidies) than can be shifted to other customers. ... Is there a place where the government, if we want to keep production here, (can) subsidize production?”
The Chinese effect
Although the Aluminum Association is against the idea of subsidies for domestic metal producers, according to Aboud, it’s in this aspect that domestic producers find themselves at a disadvantage to foreign producers, specifically Chinese producers.
The Chinese government's subsidizing of metal producers has been considered a major driver for nearly all of the ills of the global metals industry. The aluminum industry has been particularly affected, with 36 of the 50 least-efficient smelters in the world operating in China with an average direct production cost of $1,920 per tonne (amm.com, March 7).
With 60 percent of the Chinese aluminum market running at a loss, the Chinese government's subsidization of these facilities is commonly seen as the reason for depressed commodity prices. Depressed prices, in turn, limit the kind of power rates a smelter can afford. For smelters operating in free-market systems, the math doesn't add up.
“China has subsidies in all levels of the supply chain,” Aboud said. “To the U.S. producers, it feels unfair.”
The future of the dealings between power companies and smelters might, in the end, be decided by the success or failure of the U.S. industry’s efforts to stop China’s business practices from being a detriment to free-market dynamics. For the aluminum industry’s part, multiple industry offensives have been launched, with the goal being to spur the U.S. government into pushing the World Trade Organization to hold China accountable.
“If China were to truly become a market economy and play by the same rules as everyone else, then equilibrium could occur,” according to Jeff Henderson, the Aluminum Extruders Council's incoming president.
The U.S. Commerce Department in March announced that it was launching an investigation of Chinese aluminum extruder China Zhongwang Holdings Ltd. in an effort to determine whether the company has been circumventing anti-dumping and countervailing duties for its products (amm.com, March 17).
Other initiatives designed to increase regulatory awareness to Chinese trade imbalances include the China Trade Task Force and the recently announced Manufacturers for Trade Enforcement, led by the Aluminum Association (amm.com, March 16).
However, even with these initiatives moving forward, Henderson wasn’t optimistic that China’s market would turn the corner toward a more free-market approach anytime soon.
“There is no sign of it,” he said. “If anything, with the continued policy of forcing overcapacity ills out of China by way of their semifabricated/value-added tax rebate policy, it appears to be getting worse.”
For U.S. aluminum companies, until action takes place to balance Sino-U.S. relations, the only option they might have is to wait.
“We just have to weather the storm,” Aboud said.