NW aluminum smelter restart unlikely despite cheaper power
By Karen Norton and Carole Vaporean
NEW YORK, Sept 13 (Reuters) - Some market observers speculated that a drastic drop in power prices may motivate U.S. Northwest aluminum producers to restart some of 1.6 million tonnes a year of idled capacity, but analysts said weak metal prices and other concerns may prevent such a move.
``Under the current market conditions it (restarting) is still difficult for smelters to justify from a purely economic standpoint,'' said Sanjay Saraf, senior consultant at CRU International in London.
A structural power shortage in California and severe drought conditions in the U.S. Northwest had forced Bonneville Power Administration (BPA) to slash demand for its electricity. Portland, Oregon-based BPA had asked aluminum producers to shut down, as one way to bring down sky-high power prices.
Kaiser Aluminum Corp. (NYSE:KLU - news) has been identified by analysts as one potential restart candidate. Kaiser has said numerous times that it would rather operate than not.
``We are looking at (power) market prices, and we have been saying all along that we thought the market prices for power would revert to the norm. We are still trying to determine if indeed that is what we are seeing right now,'' Kaiser spokesman Scott Lamb said Wednesday.
Northwest electricity prices have returned to what some participants called ``more normal'' levels, in a stunning decline to around $28 a megawatt hour (Mwh) Mwh on Thursday, from price peaks near $1,000 a in mid-December 2000. At their worst, prices soared for brief spurts to highs around $3,400/Mwh.
Aluminum producers have cited $30/Mwh as a break-even price for electricity needed to run energy-hungry smelters. But, BPA, which supplies the bulk electricity to the Northwest, has already set power rates to the smelters at $37 Mwh.
Those rates go into effect on October 1--when a new contract goes into effect between Northwest aluminum producers and BPA--and will stand for six months.
In late January, BPA will reconsider current power rates, along with demand to determine where to set rates for the next six-month period starting in April.
Forward prices on Thursday indicate that electricity costs should hold to levels well under $100 a Mwh going forward.
Under current agreements, October 1 would be the soonest any smelter could begin operating with BPA power even if other factors permitted,
Most Northwest aluminum producers signed agreements with Bonneville not to operate their smelters for anywhere from six months to two years, beginning on October 1. BPA said it made separate agreements with each producer.
Kaiser was the only company not to agree to remain shut.
Last month, Kaiser said it had recalled between 30 and 40 workers to the Mead plant in Washington state as it pondered a reduced capacity restart under its new BPA power allotment.
Notwithstanding curtailment agreements, the price of aluminum would also be key to any restart decision.
On Thursday, London Metal Exchange three-month aluminum ended at $1,372 a tonne, near a low not seen since June 1999, and well below the 2001 high at $1,638 a tonne.
``Additionally, we are looking at the (aluminum) metal price (to consider a restart). That is always a factor. I can't give you a specific price. But, I think most observers would agree the metal price for now seems to be depressed,'' said Lamb.
CRU's Saraf estimated that, all things being equal, aluminum prices would need to be some $300-400 a tonne higher for smelters to be in a position to pay for their power needs.
``At $1,250 a tonne, some smelters are thinking of closing,'' said GNI Research analyst Lawrence Eagles.
While some restarts may be possible, Eagles said he did not envisage anything on a grand scale.
Ironically, one reason for lower power prices is the same reason for lower aluminum prices--a slowing global economy. Slack demand for the industrial metal may well preclude a smelter restart, no matter how low power prices go.
Furthermore, some analysts speculate that restarting electricity intensive smelters now would drive power costs back to untenable levels.
The aluminum industry was a major customer of BPA. One industry analyst said that when fully operational, Northwest aluminum smelters consume almost 40 percent of BPA's power.
``Restarts would lead to power prices edging higher, which affects (smelters') ability to pay for power,'' said Saraf.
The drastic reduction in NORTHWEST power was due in part to relatively mild summer temperatures in the region, federal regulators imposing tighter price controls on the market, and California adding more power plants to their grid.
But, conservation by both businesses and ordinary consumers was also key to cutting power costs.
``If the smelters do go back online, it certainly could drive prices back up,'' said one analyst.
The price of power is just one of many factors that go into deciding whether to gear up production at an idled smelter.
``There are many, many factors we are looking at. We're looking at the BPA contract, the continuing costs that we would incur if we continue to be curtailed, and then there is certainly a cost with the restart as well,'' said Lamb.
``At this point, we have not made a determination,'' he said.
Kaiser must notify BPA of its decision before October 1, according to its contract, said Lamb.