Alcoa announced last week it will temporarily idle production at two aluminum smelters at Fusina and Portovesme in Italy after the European Commission ruled that the Italian government must end preferential electricity tariffs to the company according to Reuters. The smelters have a combined capacity of 194,000 metric tons of aluminum per year and directly employ about 1,000 workers.Ã‚Â The shut-down process will begin immediately, with completion expected in the second half of December bringing Alcoa’s global smelter closures to 24% of their capacity over the last 12 months.
Alcoa argued the Italian power tariff has been in place for more than 10 years and was approved by the EC in 1995, the year Alcoa purchased the smelters. It was aimed at providing competitive power to energy-intensive industries in Italy. At current Italian power rates, Alcoa said the plants are not economic and have lodged an appeal to the Commission.
In its decision, the EC said, “The preferential electricity tariffs that Italy offered Alcoa for its aluminum smelters from 2006 to 2010 only contribute to reducing Alcoa’s operating costs and have no other justification. They therefore give the company an unfair advantage over its competitors, which have to operate without such subsidies. The commission has therefore ordered Italy to end the illegal subsidies and to recover part of the aid already paid from Alcoa,” according to a report in Mineweb. Competition Commissioner Neelie Kroes said, “Price subsidies that result in artificially low energy prices for selected companies waste taxpayers’ money and distort competition in the Single Market. Alcoa will have to pay back most of the illegal subsidies.”
It is probable Italy’s industrial power costs would be highly unattractive to Alcoa, even though Italy has some hydro-power and the best geothermal power generation in Europe the vast majority still comes from natural gas and coal. This report compares Italy’s power costs to neighboring France which produces 80% of its power from nuclear and exports electricity to Italy. French medium industrial users pay E54.1/MWh where Italy’s pay E98.3/MWh, even the EU average is significantly below Italy at E80.3/MWh. Clearly Italy has been subsidizing Alcoa, almost certainly at a direct cost to the tax payer. Alcoa’s claim that the subsidies were in place when they purchased the plants in 1995 is true but that agreement ran for 10 years with the EC’s approval. However, in 2005 Italy extended the agreement, apparently without approval. No third parties appear to be involved in that no other European producers have lodged complaints against the tariff Alcoa were charged. One wonders if they are keeping their heads down because other such agreements are coming up for renewal.
This situation raises the wider question of metals production, particularly power hungry metals such as titanium, magnesium, aluminum and so on in modern western economies increasingly burdened with environmental costs and competition for state dollars from debt laden governments. Many of the mills idled during the 2008/9 recession may never come back on stream and increasingly OECD countries will find their balance of payments impacted not just by imports of hydrocarbons but metals too.