Montenegro's KAP Aluminum Smelter Closing: 'Bout Time

Another casualty in the aluminum industry illustrates just what an enormous burden an aluminum smelter can be.

Montenegro, a country of just 660,000 people, is facing the closure or sell-off of KAP, Kombinat Aluminijuma Podgorica, a 120,000-metric-ton/year aluminum smelter conceived in the 1960s on the premise that local bauxite reserves would provide a resource base and commissioned in 1971 – just prior to the OPEC-inspired energy shocks of 1973.

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In its heyday, KAP was Montenegro’s largest single employer with 5,000 workers and still accounted for 30% of Montenegro’s exports last year, down from 40% in 2011, according to a Reuters report, but was being kept afloat only with mounting losses and huge state subsidies.

The firm was sold to Rusal’s parent company Central European Aluminium Company (CEAC), owned by Oleg Deripaska, in 2005, but the state took back half of his 58.7% stake in a 2009 debt-for-equity swap. Now the firm is owned 29.36% by CEAC, 29.36% by the government and 41% is in the hands of small investors, who are likely to be the biggest losers from the plant’s sale or closure.

In July, Montenegro launched partial bankruptcy proceedings over KAP’s 24-million euro ($30.8 million) debt to Deutsche Bank, one of several foreign banks on the hook for an estimated 360 million euros ($490 million), mostly to foreign banks, including Deutsche Bank, Hungarian OTP bank and Russian VTB bank, according to a Global Post article. But the government is KAP’s biggest creditor, accounting for 148 million euros of its debt.

On top of that, it issued guarantees for a 132-million-euro loan and now needs to make additional borrowings to secure funds for the payment. The bank debt alone is worth almost 9% of Montenegro’s gross domestic product.

Silver Lining in KAP Closure?

While workers and their families will no doubt face considerable hardship at the loss of the remaining employment positions, the wider public may celebrate the plants closure.

KAP has been accused of widespread pollution, not least the production of red mud waste which during the dry summer months gets turned into dust and blamed for health problems. Electrical consumers also face frequent power losses while the smelter consumes most of the country’s meager electricity production at a fraction of the price paid by retail and other industrial users.

Maybe KAP is an example of a plant that really has no right to exist in the modern world, like Alcoa’s plants that were mothballed in Europe. The region has power and environmental costs that make aluminum smelting uneconomic for all but the most modern and efficient plants.

The export of primary aluminum is the export of energy, and Europe’s energy costs are too high and its needs elsewhere should take precedence – better to leave aluminum smelting to regions with an excess of natural gas or hydro power for which there are limited alternatives.

It’s hard to see how Montenegro can afford to continue subsidizing aluminum smelting even if its progress towards EU membership did not preclude such support down the road.

Read more from Stuart Burns.

FREE Download: The Monthly MMI® Report – covering the Aluminum market.

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