Why Did Century Aluminum’s Energy Costs Come Down?

In the last part of this series, we discussed why electricity is important for aluminum companies. Aluminum companies have captive power plants to meet their electricity requirements.

Alcoa (AA) is 20% self-sufficient in its electricity needs. Rio Tinto (RIO) produces ~36% of its electricity requirements. Century Aluminum (CENX) sources most of its electricity from third parties. Currently, it forms 3.99% of the SPDR S&P Metals and Mining ETF (XME). Reliance Steel & Aluminum (RS) forms 3.41% of XME.

The above chart shows the power prices in Kentucky. As you can see, the prices came down in the last quarter. There are several reasons for lower electricity prices this winter.

• Weather – The weather hasn’t been as harsh this year. Due to the polar vortex, parts of the US faced extreme weather last year. This led to higher electricity prices. This can be verified from the above chart. Electricity demand has been subdued this winter. The weather conditions have been normal.
• Supply – Electricity supply went up in the last few months. However, the electricity demand hasn’t kept pace with the increased supply.
• Lower energy prices – Prices for fossil fuels—like crude oil, natural gas, and coal—came down. This reduced the input costs for power producers. Lower crude oil prices also impact electricity prices. Recently, crude oil prices fell to their five-year lows.

Since electricity is a key raw material for aluminum companies, they tend to enter long-term supply contracts with power suppliers. What’s Century Aluminum’s raw material strategy? We’ll discuss this in the next part of this series.