Time for Kaiser to roll up its sleeves

With the two-year labor dispute resolved, company officials now must find profits amid changed markets and rising costs
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Bert Caldwell - Staff writer


The world did not stand still while Kaiser Aluminum and the United Steelworkers of America grappled over a new contract.

Consolidation swept the aluminum industry. Electricity prices rose to unprecedented levels. Markets rose, or didn't, depending on the product.

The contract dispute may have grabbed the headlines, but other serious challenges face the nation's second largest aluminum maker.

As Bear Stearns analyst Anthony Rizzuto put it: "They're not out of the woods."

Kaiser Chairman Ray Milchovich agrees.

"Things are moving faster than they did before. They're tougher," he said in an interview last week.

Milchovich said the strike-lockout that ended Monday with a new contract produced in binding arbitration was not a confrontation Kaiser wanted, but was necessary to bring its costs in line with competitors'.

"This took a toll on our whole organization," he said.

Although the job action cost Kaiser tens of millions of dollars, Milchovich said the company will soon recover those expenses.

He and analysts who cover Kaiser stressed the additional challenges presented by energy prices and the company's debt.

Rizzuto added the unresolved National Labor Relations Board charges against Kaiser to the list.

The union has estimated the company's potential liability in the unfair labor practices case at $337 million, a figure Kaiser officials say is vastly inflated.

Unless the company and union can negotiate a settlement, the matter will go to trial Nov. 13.

But Rizzuto said the overarching concern is about global economic issues.

"What is the impact of rising oil prices?" he asked. "There's a lot of stresses out there."

Expensive oil -- prices last week were the highest since the 1991 Persian Gulf War -- will translate into higher fuel costs for the airline industry and a possible slowdown in orders from the aerospace industry, Rizzuto said.

That would hurt one of the Trentwood rolling mill's healthiest markets, he said.

"There's got to be some uncertainty," he said.

Rizzuto said last week was "bloody," with Alcoa announcing that third-quarter earnings would fall short of estimates, and evidence that orders for truck trailers have declined by half in recent months.

Truck manufacturers are heavy users of aluminum.

The market for aluminum housing products has also declined, he said, and distributors are overstocked.

Rizzuto called Trentwood a good mill that can do well supplying niche markets such as aerospace and general engineering.

The decision made during the strike-lockout to discontinue production of can sheet at Trentwood was a good one, he said.

"They were at a disadvantage in using a multifunctional mill," he said.

Rizzuto said competitors with plants dedicated to can sheet production can accept tight profit margins because they produce more.

Leo Larkin, an analyst with Standard & Poor, has a brighter view of aluminum industry prospects than Rizzuto.

"The market itself is in reasonably good shape," he said.

Larkin said smelter shutdowns in the Northwest, including Kaiser's Tacoma plant, have tightened worldwide supplies.

Also, imports from Russia that softened world prices through much of the 1990s seem to be declining, although he cautioned that finding accurate information about that country's internal supply and demand balance is difficult.

Larkin said aluminum inventories at the London Metal Exchange are low.

He said Kaiser must convert lower production costs made possible by the labor agreement into profits that will help the company reduce its almost $1 billion debt.

The alternative, he said, is selling plants.

Larkin said trimming debt would position Kaiser for a merger. That path might be foreclosed when the industry hits a down cycle, he said.

Larkin rates Kaiser stock a "hold."

"This is certainly a speculative situation," he said.

Analyst Robin Adams plugged some discouraging numbers into the electricity equation in the Northwest.

Prices for power hit $212 per megawatt-hour Wednesday, he said. Smelters consume 16 megawatt-hours to produce one ton of aluminum.

So smelters spent more than $3,200 on electricity to make the ton of metal.

"These numbers are impossible for aluminum," Adams said. "Aluminum has never been that high. Not even for a minute."

At 75 cents a pound, roughly last week's price, a ton of aluminum brings only $1,500.

Adams works for Resource Strategies, a longtime consultant and analyst to the industry.

He described Trentwood as a "decent" mill, but too far removed from many of its markets.

Shipping a pound of finished aluminum to the Midwest costs about five cents, he said, an amount that all but eliminates profits.

That is not a problem with aerospace products valued at up to $1.50 per pound, he said. But aircraft components constitute only 5 percent of the aluminum market.

Adams said Kaiser may not be able to make maximum use of Trentwood's capabilities if the mill serves only niche markets.

But some aluminum customers may favor Kaiser, he said.

Although the industry is highly competitive, the Alcoa-Reynolds Metals merger and the one pending between Alcan and Alusuisse Group are reducing the number of players.

Adams said customers, in order to sustain as many suppliers as possible, may choose Kaiser when the company and a competitor are quoting the same price on a product.

"I think the good will is there," he said.

But customers do not like strikes, Adams said, because they raise questions about reliability and quality.

The strike-lockout also stirred doubts about the level of commitment to Kaiser by both Steelworkers and ownership, he said.

Still, Adams said, commitment, products and power are secondary issues.

"I think the problem for Kaiser can be summed up in one phrase -- `too much debt for too long,"' he said.

The bottom line is also Milchovich's bottom line.

"We need to constructively generate and multiply cash," he said. "We must have earnings growth."

That was one reason production of can stock at Trentwood was discontinued early this year, Milchovich said.

There was little or no profit in making a product that captured just 3 percent of the world market, he said.

And efforts to manufacture can stock diverted attention from other, more profitable products, he added.

Milchovich said Trentwood's output may decline in the future, but margins will be much better. The emphasis, he said, will be on dollars, not pounds.

"What we're trying to do here is do only the right things," he said.

Milchovich said Kaiser is installing $20 million in additional equipment for making heat-treated plate, which is used in aircraft and other applications, because the investment can be quickly recaptured.

He also is optimistic about the prospects for the Gramercy, La., alumina refinery, which is undergoing $200 million in reconstruction following an explosion in July 1999.

New technology will make that plant among the more efficient in the world, he said.

Milchovich said Kaiser bauxite processing facilities in Jamaica and Australia also might be upgraded.

Or funds may be spent on "bite-size" purchases of firms that make engineered aluminum products, he said.

Kaiser, Milchovich noted, is earning a 20 percent rate of return on this year's $16 million purchase of an aluminum tubing plant in Chandler, Ariz.

The firm's engineered products division, with 12 plants, has thrived, he said. "It's become a growth platform for us."

Milchovich said the outlook for Kaiser's Northwest smelters is more problematic.

Electricity prices threaten all 10 plants in the region, with three -- including Kaiser's Tacoma facility -- already shut down. Two and a half of Mead's eight potlines, where alumina is converted into aluminum, are down, despite what Milchovich said was outstanding work by supervisors and replacement workers who kept the plant going the past two years.

"It's very, very discouraging," Milchovich said.

Unless the Bonneville Power Administration makes more of its low-cost electricity available, he said, the aluminum companies, their employees and the whole region will take a tremendous economic hit.

The federal power-marketing agency has cut the energy allocated to its industrial customers by about one-quarter under contracts due to go into effect Oct. 1, 2001.

Milchovich said that, if anything, Kaiser's relationships with customers were strengthened during the strike-lockout, despite Steelworker efforts to discourage purchases.

Customers of the damaged Gramercy refinery, for example, were impressed by the efforts Kaiser officials made to fulfill the company's commitments by scrounging alumina supplies from other sources, he said.

"I believe that Kaiser's customer relationships are better than at any time in the past," Milchovich said.