Continued Look at Smelter Closings

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Editor’s Note: You can read  the rest of this post  here, where you’ll find more information on whether or not the recent Rockdale closing could be a predictor of more to come for the industry.

Over the last year or two the aluminum price has repeatedly spiked on concerns about power supplies, notably in South Africa and China. Since then, much has been made about the steady decline in the ingot price tracking a decline in the oil price. Both issues underline aluminum’s sensitivity to power costs and investors appetite for the metal being driven by the focus on energy input costs.

So as energy costs have come down it may at first sight seem strange that Alcoa has decided to take a $48m 3rd quarter hit and close their Rockdale Smelter in Texas.   Alcoa has blamed expenses related to long running supply and cost issues associated with Luminant’s on-site power plant – a charge the power company vigorously denies saying there have been no supply issues since part of the smelter was idled earlier this year and no changes in power costs. Clearly the plant must be uneconomical. No company takes a $48m hit unless it is the lesser of two evils. The reality is probably that Rockdale like many other aluminum mills, is getting close to or even below its marginal cost of production. That break point is different for every mill. One of the strategic advantages of Rio’s purchase of Alcan was that among major producers Alcan had the highest percentage of power sourced from hydroelectric and so could expect power costs and carbon emissions to be among the lowest  of OECD producers. However the company found out this year that even hydroelectric is not immune from power cost disruptions. Rio Tinto has only just begun  the gradual return to full production of their 350,000 ton per year Tiwai Point smelter in New Zealand after part of the plant was shut down earlier this year when a drought pushed marginal power costs up to $270 per MW hour in June. They have since dropped back to an average of $19 now. At full production, Tiwai Point uses almost 15% of New Zealand’s power so when the nearby hydroelectric facilities were put on reduced capacity due to water shortages, Tiwai struggled to get enough economically priced power. For more on this topic,  we have a post from yesterday  that you might want to read.

 –Stuart Burns

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