Aluminum production is a very energy intensive process. Almost a quarter of aluminum smelting costs go towards electricity. This makes electricity prices a key driving factor for aluminum companies. There are several ways that aluminum producers fulfill their electric power requirements.
A lot of aluminum plants have captive power plants. The plants produce their own electricity. To reduce the electricity costs, a lot of companies set up their smelting plants near cheap sources of electricity like hydropower.
Also, aluminum companies source electricity under long-term power supply arrangements. Some companies also source electricity under the market rates. In this part, we’ll look at how different primary aluminum producers manage their power supply.
Power supply arrangements
- Rio Tinto (RIO) has captive power plants that meet 36% of its power needs. It has long-term power purchase contracts for another 30% of its power requirements. According to Rio, “almost 80% of its total power needs comes from non-fossil-fuel based” sources compared to an industry average of 35%.
- Alcoa (AA) is self-sufficient in 25% of its power needs. The remaining power requirements are met through long-term supply contracts.
- Norsk Hydro (NHYDY) has one of the highest captive power generations at two-thirds of its total power needs. The company generates power mostly through hydropower. For the remaining needs, Norsk has long-term power supply agreements. Overall, Norsk Hydro uses hydropower for almost 70% of its power requirements.
- Century Aluminum (CENX) sources power through a mix of open-market purchase and long-term supply agreements. The above chart shows Century Aluminum’s power supply arrangements. The company doesn’t own any captive power plants. Century Aluminum has a long history of power supply related issues at its plants. Currently, it forms 2.68% of the SPDR S&P Metals and Mining ETF (XME).
In the next part, we’ll explore how power supply arrangements impact aluminum companies.