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Analyzing Century Aluminum’s Power Supply Agreements

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Power supply

As discussed in the last part of this series, electricity is a crucial raw material for aluminum companies. Major producers—like Rio Tinto (RIO) and BHP Billiton (BHP)—have captive power plants to produce electricity. Now, we’ll look at Century Aluminum’s (CENX) power supply agreements. It’s important to note that Century Aluminum forms 3.99% of the SPDR S&P Metals and Mining ETF (XME).

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Power supply agreements

The above chart shows Century Aluminum’s different energy supply agreements. We’ll analyze the agreements in more detail.

  • Hawesville plant – At this plant, Century Aluminum purchases electricity at market-based pricing.
  • Sebree plant – Century Aluminum moved to market-based pricing at this plant in 2014. The transition wasn’t smooth. Century Aluminum threatened to close the plant if it wasn’t given access to electricity at market prices. This plant is one of the largest employers in the region. It supports 500 jobs. It pays almost $4 million annually towards state and local taxes. Finally, the Kentucky Public Service Commission, or PSC, permitted Century Aluminum to buy electricity at market-based pricing. As a result, Big Rivers Electric Corporation—the electricity supplier in that region—suffered a loss. As a result of this move, the Kentucky PSC had to revise electricity prices for other customers in that region.
  • Mt. Holly plant – It buys power under long-term supply agreements. Previously, Alcoa (AA) was the joint venture partner in this plant.
  • Grundartangi plant – In this plant, Century purchases electricity under long-term supply agreements. The electricity prices are based on the aluminum prices on the London Metal Exchange, or LME.

Century Aluminum benefited from lower electricity prices in Kentucky. However, some of its smelters are idled. It hasn’t been able to secure power contacts. We’ll discuss this in more detail in the next part of this series.

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