Rising power costs mean dark days for aluminum industry
Friday, March 30, 2001
SEATTLE POST-INTELLIGENCER STAFF AND NEWS SERVICES
An end to the cheap electricity that made the Pacific Northwest the center of the nation's aluminum making for more than a half-century may signal the demise of one of the region's bellwether industries, some analysts say.
The Bonneville Power Administration, a federal agency that supplies about half the region's power, said it may increase rates as much as 60 percent because of surging demand. This comes as Alcoa Inc., Kaiser Aluminum Corp. and other companies are closing plants in the region because of rising costs.
Smelters that are determined to stay already have taken steps to start producing their own power.
"To have those jobs and that tax source go away in those communities is going to be a huge hit," said Kristen Sawin of the Association of Washington Business, which represents aluminum companies. "That's a real travesty, because you can't replace those high-paying jobs easily."
But even if the state's aluminum plants were to close, their most obvious customer, The Boeing Co., will do just fine. The world's largest aircraft builder long since entered into long-term fixed-price contracts with producers all around the globe.
Nationally, though, the problem could be serious, affecting not only jobs but the country's trade balance. Almost half the nation's aluminum-making plants, or smelters, are in Washington, Oregon and Montana. The BPA estimates the industry employs about 6,000 workers. Shutdowns and output cuts have taken out about 5 percent of the world's production, U.S. government figures show. With electricity accounting for about a third of costs, the outlook isn't optimistic.
"Some major portion of the industry is probably down permanently," said Lloyd O'Carroll, an aluminum-industry analyst at BB&T Capital Markets in Richmond, Va.
Kaiser, the second-largest U.S. aluminum maker, has shut down smelters in Tacoma and Mead, near Spokane, which combined can make 274,000 metric tons of aluminum a year. It laid off 400 workers.
Glencore International AG cut production at a Montana smelter by 28 percent in December. Alcoa, the biggest aluminum maker, cut Northwest output by a combined 275,000 metric tons, or 6.4 percent of U.S. capacity, over the past year.
McCook Metals LLC agreed to halt production this month at a smelter it acquired only days earlier from Alcoa in Longview so it could make more power available to the BPA.
The abundance of power once available from the BPA is why most of the smelters are situated in the Northwest. Hydroelectric dams, built by the federal government on the Columbia River to create jobs during the Great Depression, generated a huge surplus of power that could be sold for far less than in other regions.
More smelters were built during World War II to supply the aluminum used by Boeing to build B-17 Flying Fortresses and other military aircraft.
But years ago, plagued by uncertain supplies and given improved methods for transporting materials from virtually anywhere, the company started signing long-term contracts with producers around the world.
"We aren't dependent on Northwest suppliers for our aluminum," Boeing spokeswoman Deborah Dustman said. "Aluminum literally comes from everywhere, hundreds and hundreds of mills."
Despite the new broader market for buying aluminum, the nation's demand for the lightweight metal is growing. Aluminum accounts for about three quarters of the materials used in making aircraft. But automakers, too, are using more aluminum in trucks and cars to limit pollution and improve performance by making vehicles lighter.
Smelters in Northwest can make as much as 1.8 million metric tons of aluminum a year, or about 43 percent of nation's capacity.
More than 1.2 million metric tons of that capacity has been idled by the energy crisis of the past eight months.
Low-cost power has been a primary reason the aluminum makers stay in the Northwest. Three years ago, electricity costs in Washington, Idaho and Oregon ranked in the bottom five of the 50 states and Washington, D.C., the U.S. Department of Energy said. Power consumers in those states paid about half the national average.
The current Northwest power-price surge is a consequence of California's energy crisis. That state's two biggest utilities ran up more than $12 billion in debt last year buying power in the open market at higher prices than they could pass on to customers. California prices surged because of increased demand, a lack of new power generation and high natural-gas prices.
Northwest dam operators drained reservoirs this winter so they could produce more power to supply California. Rainfall, unseasonably low, hasn't made up for the loss. The water supply is at relatively low levels.
Most of the smelters get some of their electricity through fixed-price contracts with the BPA. They buy the rest in the open market. Sales to smelters and a few other industrial customers make up about one-fourth of BPA's $2 billion of annual revenue.
When power prices surged, aluminum companies shut smelters that relied on open-market purchases, and kept running the plants that used BPA power. Now BPA prices are expected to surge, which could result in complete shutdowns, analysts said.
To avoid such a scenario, some smelters are making plans to develop their own sources of electricity. The operator of aluminum smelters at Goldendale and The Dalles, Ore., has signed an agreement with a developer to build a new natural-gas-fired combustion turbine to power the smelters.
And McCook Metals' smelter at Longview plans to develop its own natural-gas-fired generator that will take the facility off the regional power grid by the middle of this decade.
The United Steelworkers union yesterday proposed that BPA implement a rate plan for the next five years that gives some rate relief to aluminum smelters, but also calls for them to be off the Bonneville system by 2006.
The union's plan calls for all BPA customers to get about 75 percent of their allocation for 2001-2006 at the rates proposed by BPA before the price surge caused the agency to warn of sharply higher prices. The balance would be sold at market rates.