As discussed in the previous part of this series, Alcoa (AA) announced production cuts of more than 500,000 metric tons earlier this month. However, on November 24, the company announced that it would not be idling the Massena West smelter. Let’s see what prompted Alcoa to keep the smelter running despite falling aluminum prices.
According to a Reuters report, citing Governor Andrew Cuomo, “The state’s power authority will provide $30 million in power assistance, and New York’s Economic Development Commission will provide $38.8 million in capital and operating expenses to modernize the plant.”
Getting power at competitive prices is key for aluminum smelters, especially when market conditions are as challenging as they currently are. Electricity costs make up almost one-third of aluminum’s production costs.
Most aluminum companies, including Rio Tinto (RIO) and Norsk Hydro (NHYDY), have captive power plants to fulfill their electricity requirements. Rio Tinto’s aluminum operations meet 36% of their electricity needs through captive power plants. Norsk Hydro has one of the highest captive power generation capacities, at two-thirds of its total power needs.
Century Aluminum (CENX) does not have captive power generation capacity. The company relies on long-term purchase contracts and spot purchases to meet its electricity needs. Apparently, all of Century’s smelters, except Grundartangi, are facing power-related issues. Its Mt. Holly smelter also risks being idled if it’s not able to secure a new power contract by the end of the year.
Other US (SPY) aluminum producers, including Century, could also be looking at state support, citing job losses if the plants are idled. Incidentally, the Mt. Holly smelter has an employee strength similar to that of Alcoa’s Massena West smelter. In the next part of this series, we’ll look at some of Alcoa’s other recent developments.