Analyst sees U.S. Northwest aluminum plant restarts
By Zach Howard
NEW YORK, Jan 30 (Reuters) - J.P. Morgan analyst Michael Gambardella said on Wednesday some aluminum smelters in the Pacific Northwest could restart idled production this year, further weakening aluminum prices.
"We believe restarts of aluminum capacity in the Pacific Northwest will occur this year and will dampen aluminum prices, producers' earnings and share prices," the analyst said.
Aluminum smelters in Washington, Oregon and Montana began to halt production in 2000 as rising power costs and slumping aluminum prices made them unprofitable to run. About 1.6 million tons of northwestern capacity still remain shuttered.
Gambardella's comments accompanied the downgrade of his investment rating on Century Aluminum to "market perform" from "long term buy," citing the potential for weaker aluminum prices.
He said in a research report that cheaper electricity prices in the Northwest now and new "take-or-pay" power contracts between smelters and the Bonneville Power Authority (BPA) starting on April 1 will help reopen some of the plants shut there.
"All of the Northwest smelters except Kaiser Aluminum signed curtailment agreements with the BPA in early 2001 at the height of the power crisis in the region," he wrote in the report.
He said those agreements state that BPA will pay the smelters $20 per megawatt hour (MWh) for power normally purchased from the BPA if they curtailed these purchases.
"We recently learned that these smelters could restart, acquire power from non-BPA sources and still receive the $20 per MWh payment from the BPA," said Gambardella.
Since spot electricity prices have dropped to about $22 per MWh and smelters can still receive BPA's $20 per MWh payment, power costs to restart capacity could be near zero, he said, making it "very appealing" to do so, even with still-weak aluminum prices.
Ed Mosey, spokesman for power supplier BPA, told Reuters that smelters operated by Golden Northwest Aluminum and McCook Metals in Washington have the option to start taking some power again from BPA as of April 1.
Mosey also said that BPA and aluminum producer Alcoa Inc.
could "mutually agree" to terms that would allow Alcoa to start taking some power for its local operations. In total, only those three companies had a contractual option to start taking power from BPA again in 2002, he said.
Kaiser Aluminum Corp. had said in October it could restart about 110,000 tonnes of its idled 273,000 tonnes of Northwest smelter capacity with power allotted to it, but aluminum prices have since remained too weak.
Aluminum for delivery in three months traded on the London Metal Exchange closed Wednesday at $1,361 a tonne, or about 62 cents a pound, still hovering close to a three-week low.
In January 2000, LME aluminum traded at $1,754 a tonne, or almost 80 cents a pound.
Gambardella said recent smelter restarts in Brazil and the likely restart of capacity in the Pacific Northwest could increase the global aluminum supply by 4.8 percent.
Friday, Australia-based BHP Billiton Ltd's Brazilian unit said the Alumar and Valesul smelters are resuming full output following the end of a national energy rationing program begun last June.
Brazilian and U.S. restarts would extend the surplus of aluminum in the industry, Gambardella said.
J.P. Morgan has forecast 2002 demand growth will run at 3.0 percent. Aluminum warehouse stocks in LME warehouses remain plentiful at 852,975 tonnes.
In his report, Gambardella called the Northwest power market "clearly a buyer's market," due to lower power demand, about 1,545 megawatts of new power coming on-line in the area this year and much-improved water levels to support area hydroelectric power plants, which create 80 percent of regional power.