Aluminum Making May Vanish in U.S. Northwest as Power Surges

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03/26 03:01 Aluminum Making May Vanish in U.S. Northwest as Power Surges

By Darrell Hassler

Mead, Washington, March 26 (Bloomberg) -- An end to the cheap electricity that made the Pacific Northwest the center of U.S. aluminum making for more than half a century may signal the demise of one of the region's bellwether industries, analysts said.

The Bonneville Power Administration, a federal agency that supplies about half of the region's power, said it may increase rates as much as 60 percent because of surging demand. This comes as Alcoa Inc., Kaiser Aluminum Corp. and other companies are shuttering plants in the region because of rising costs.

``To have those jobs and that tax source go away in those communities is going to be a huge hit,'' said Kristen Sawin of the Association of Washington Business, which represents aluminum companies. ``That's a real travesty, because you can't replace those high-paying jobs easily.''

Almost half of the nation's aluminum-making plants, or smelters, are in Washington, Oregon and Montana. The BPA estimates the industry employs about 6,000 workers. Shutdowns and output cuts have taken out about 5 percent of the world's production, U.S. government figures show. With electricity accounting for about a third of costs, the outlook isn't optimistic.

``Some major portion of the industry is probably down permanently,'' said Lloyd O'Carroll, an aluminum-industry analyst at BB&T Capital Markets in Richmond, Virginia.

Kaiser, the second-largest U.S. aluminum maker, has shut down smelters in Tacoma and Mead, Washington, which combined can make 274,000 metric tons of aluminum a year. It laid off 400 workers.

Glencore International AG cut production at a Montana smelter by 28 percent in December. Alcoa, the biggest aluminum maker, cut Northwest output by a combined 275,000 metric tons, or 6.4 percent of U.S. capacity, over the past year.

McCook Metals LLC agreed to halt production this month at a smelter it acquired only days earlier from Alcoa in Longview, Washington, so it could make more power available to the BPA.

Industry Roots

The abundance of power once available from the BPA is why most of the smelters are situated in the Northwest. Hydroelectric dams, built by the federal government on the Columbia River to create jobs during the Great Depression, generated a huge surplus of power that could be sold for far less than in other regions.

More smelters were built during World War II to supply the aluminum used by Seattle-based Boeing Co. to build B-17 Flying Fortresses bombers and other military aircraft.

The smelters in the region can make as much as 1.8 million metric tons of aluminum a year, or about 43 percent of U.S. capacity. More than 1.2 million metric tons has been idled over the past eight months.

Most of the companies get some of their electricity through fixed-price contracts with the BPA. They buy the rest in the open market. Sales to smelters and a few other industrial customers comprise about one-fourth of BPA's $2 billion of annual revenue.

BPA ``is the best deal going,'' said Irene Ringwood, an attorney that represents aluminum companies in the Northwest.

Three years ago, electricity costs in Washington, Idaho and Oregon ranked in the bottom five of the 50 states and Washington, D.C., the U.S. Department of Energy said. Power consumers in those states paid about half the national average.

California Crisis

The Northwest power-price surge is a consequence of California's energy crisis. That state's two biggest utilities ran up more than $12 billion in debt last year buying power in the open market at higher prices than they could pass on to customers. California prices surged because of increased demand, a lack of new power generation and high natural gas prices.

Northwest dam operators drained reservoirs this winter so they could produce more power to supply California. Rainfall hasn't made up for the loss, leaving water supply at low levels.

When power prices surged, aluminum companies shut smelters that relied on open-market purchases, and kept running the plants that used BPA power. Now BPA prices are expected to surge, which could result in complete shutdowns, analysts said.

About 15,700 kilowatt hours of electricity are needed to make a metric ton of aluminum, the International Aluminum Institute said. If power prices rise by 60 percent, smelters would have to pay about 3.5 cents a kilowatt-hour, or $550, to make a metric ton. Aluminum makers have been paying about 2.2 cents over the past five years, analysts said.

``It starts to become much less economical to run a smelter'' at 3 cents a kilowatt-hour, Kaiser spokesman Scott Lamb said.

Public Purpose

The BPA has seen increased demand from utilities that previously bought their power in the open market. By law, BPA can't turn utilities away, so it has to buy power on the open market and sell it at cost to the utilities and others.

BPA has contracts to provide about 11,000 megawatts of power, enough to light 11 million typical U.S. homes. The agency can produce 9,000 megawatts. The aluminum industry uses about 3,000 megawatts.

``The rate (increase) is going to be fairly high,'' BPA spokesman Ed Mosey said. Companies ``will have to decide if they will continue'' to make aluminum in the Northwest.

In towns such as The Dalles, Oregon, those decisions are already being felt. Golden Northwest Aluminum Inc. told employees two days before Christmas that it would slow production to 10 percent of capacity to sell back power, said Susan Huntington, executive director of The Dalles Chamber of Commerce.

The average annual salary in Wasco County, which includes The Dalles, is about $28,000 a year. While union workers are still paid by Golden Northwest, they don't receive overtime, she said.

``For some of them, that was quite a cut,'' Huntington said.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOr73PBVSQWx1bWlu

-- Martin Thompson (mthom1927@aol.com), March 26, 2001


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