Century Aluminum’s supply chain issues
In the previous part of this series, we discussed why Alcoa (AA) sold its stake in the Mt. Holly plant. One of the issues the Mt. Holly plant has been facing is with respect to electricity supply. In fact, Century Aluminum (CENX) has been facing issues related to electricity supply at its other plants also. Let’s first understand why electricity is so important for aluminum companies.
Why electricity supply is crucial for aluminum companies
The chart above shows the various raw materials necessary for aluminum production. As you can see, it takes around four pounds of bauxite and upto 8 kilowatt hours (or KWH) of electricity to produce one pound of aluminum.
The cost of electricity represents around one third of the cost of smelting. As a result, electricity prices are a key driving factor for aluminum companies. Also, it becomes crucial for aluminum companies to secure electricity supply for their plants.
Aluminum companies have captive power plants
One way of securing electricity supply is to produce electricity through installing a captive power plant. When a company installs a power plant, primarily for its own use, it’s referred as a captive plant. All aluminum companies produce some of their electricity requirements through captive power plants.
It takes a lot of capital to install these power plants. As a result, aluminum companies enter into supply agreements with utility companies. This helps aluminum companies like Constellium N.V. (CSTM) and Rio Tinto (RIO) to secure supply of this crucial raw material.
Century Aluminum had to halt construction of one of its plants in Iceland, as it was not able to secure power supply agreements.
In the next part, we’ll delve further into the electricity supply issues that Century Aluminum is facing. Currently, CENX is a part of the SPDR S&P Metals and Mining ETF (XME).
When originally published, this article mistakenly described the electricity consumption per pound of aluminum at 13 kWh. Also the graph in this article mistakenly valued the electricity consumption per pound of aluminum at 13 kWh. We have since changed it to 8 kWh. We regret these errors.