BPA to aluminum industry: Be patient
Agency predicts two rough years, then affordable rates after that
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John Stucke - Staff writer
After six decades of nonstop operation, the aluminum smelter in Mead sits quiet these days.
The parking lot is empty, save for a few cars driven by Kaiser Aluminum Corp. management and the most senior members of its union work force.
Smoke doesn't curl from the stack. There are no trucks hauling molten metal to the Trentwood rolling mill.
The scenes are much the same in other Northwest towns where aluminum companies have prospered on what was once a cheap, reliable and plentiful supply of electricity.
Some fear the aluminum companies won't restart their smelters; that their enormous thirst for cheap electricity will send them stampeding to other countries.
Others encourage calm.
"I'll tell you what," said Steve Hickok, the Bonneville Power Administration's chief operating officer, "within the next couple of years, if electricity is a critical part of your business and you're considering where to operate, you haven't got a better setup than in the Pacific Northwest."
Asked to look ahead five years, Hickok recently said: "Here it is. The first two years are awful. The last three are pretty good."
In fact, despite the gloom about electricity, analysts say the Northwest aluminum curtailments have been good for "big-picture" metal prices.
"There's no question it is has helped support prices," said Leo Larkin, who tracks metals markets for Standard & Poors. "It's keeping supplies tight."
That's been important during this year's economic malaise. Just as demand eases from big users of aluminum such as auto manufacturers, packaging companies and construction firms, supplies of aluminum have declined in time to firm prices.
Take Alcoa, the world's largest aluminum conglomerate. While its Northwest properties struggle, stable prices are helpful for its $23 billion operation in 26 countries.
Larkin said when the economy regains momentum, prices for aluminum should climb. That should be enough incentive to restart the Northwest's idled smelter capacity.
The troubled economy also may keep interlopers away.
"There's no real plans for (major) new capacity that I've heard of," Larkin said.
Robin Adams, an aluminum analyst with Resource Strategies, said it won't be demand that keeps smelters from restarting.
He agrees that the U.S. will snap out of its economic doldrums, perhaps bring Japan out of a recession along the way.
Instead, it will be the region's ability to re-establish cheap power and the efficiency of individual smelters.
Important, Adams said, is encouraging new electricity production. He's quick to criticize power price caps, calling them a misguided political salve Congress may consider to ease soaring energy costs in the West.
Such regulation would strangle new power generation, he said.
"The thing with commodities, whether it's oil, copper or gold, every once in awhile, something happens," he said. "So now, when the commodity market is up, the government wants to take it away.
"Well, what's the incentive to buy commodities?"
When the region's smelters run at full speed, they can produce more than 1.4 million metric tons per year, or about 40 percent of the U.S. aluminum supply.
But some are better equipped to run efficiently.
He said Kaiser's smelters in Mead and Tacoma are older and may not be able to operate profitably when power prices are high. Lasting through the years while electricity prices are high will be the problem.
Outside the Pacific Northwest, much of the remaining U.S. aluminum production comes from the Ohio River Valley.
Overall, about 40 percent of the nation's aluminum is made in the Northwest.
Replacing such production within two years would be a stretch, added Robin King of the Aluminum Association.
The largest aluminum importer is Canada, and it's facing power problems of its own, King said.
For example, Alcan Inc. has cut smelter production in half at its massive Kitimat smelter in British Columbia because of low water in dam reservoirs.
Russia is the next-largest aluminum importer, King said, and it has power supply problems and outdated technology.
Still, concerns abound. Aluminum demand is growing at more than 3 percent each year -- enough to at least encourage new smelter speculation.
David Foster, a United Steelworkers of America director overseeing union affairs in the Northwest, said the union has been pushing for more flexible curtailments.
"It would be a big mistake to announce to the rest of the world that the Pacific Northwest is closed down for two years," he said.
If the aluminum smelters close because the rates from BPA are too high, Foster said, at least there's a provision in place to revisit the rates every six months to see if restarting makes sense.
Another plus, Foster said, is that BPA is paying workers during the shutdowns. That keeps an experienced crew ready for return.
If BPA can muster the megawatts before 2003, it may offer them to smelters at an affordable rate. If not, added Hickok, the 3,000 megawatts of new power scheduled to be online in two years will help.
If just a few thousand of the 25,000 megawatts under study develop, the region should enjoy some of the cheapest power in the world.
He pointed to natural gas supplies in Alberta and massive reserves of low-sulfur coal in Wyoming and Montana that could boost supply, and, he said, keep prices competitive.
Adams predicted the region will eventually settle into electricity that costs about $30 a megawatt hour with new supplies and existing hydropower.
A megawatt hour is enough power to serve about 600 homes for 60 minutes.
"So that's the broad picture," Adams said. "Without price caps and (with) new generation."
Added Hickok: "In real dollars, there's a lot of reason to believe energy won't be more expensive.
"But I do have to apologize for the next two years."