Century Aluminum takes power issue to Kentucky lawmakers

Kentucky state lawmakers are set to decide whether to let US aluminum producer Century Aluminum Co buy power on the open market in its bid to save its money-losing smelter in the Bluegrass state from closure.

In its attempt to cope, Century has taken the dramatic step of pushing for legislation that would exempt smelters from a state law requiring consumers to take power from only one supplier.

“We’re losing money every month. What the bill would do is get me out from under that exclusive service contract,” said Michael Early, Century’s energy director, in testimony last month before Kentucky’s House Natural Resources and Environment Committee.

The bill could have bigger implications for the troubled US aluminum industry, where high-cost electricity for aging plants has challenged many producers to seek ways to operate more efficiently, especially as benchmark aluminum prices have come down by more than 30% in less than two years.

Reuters data shows US aluminum output has fallen by 20% over the past decade to 2.03mn tonnes last year, and the number of smelters has dropped by more than 30% to 10 plants over the same period.

At current aluminum prices, close to 4.3mn tonne of production outside of China is unprofitable, according to Barclay’s base metals analyst Nick Snowdon. That is about 8% of global output.

While Rio Tinto is not involved in the Kentucky legislation, it has been watching closely from the sidelines. It uses the same energy supplier as Century. Rio Tinto also gave notice that it will end its power contract for its 194,000-tonne-a-year Sebree smelter in January 2014, following a proposed hike in electricity rates.

Shutting the two smelters, with combined output of 440,000 tonnes of aluminum a year and representing more than a fifth of US primary production, would have ramifications beyond Kentucky’s borders. A tighter aluminum supply would push up the metal’s price, and in turn, increase costs for carmakers, beverage companies, construction sites and many other industries.

“I think it will be a pretty critical decision, not just for these facilities, but for the broader outlook for broader market fundamentals,” said Barclay’s analyst Snowdon, who expects global oversupply of 1.8mn tonnes.

Within Kentucky, closing Century’s 244,000-tonne-per-year Hawesville smelter will result in an estimated loss of $800mn a year in state revenue and 750 jobs.

Despite its closure notice, Century appears determined to work out a viable operating plan for the Hawesville smelter. It took its power issue to the state government after failing to negotiate new terms that would allow it to tap the open market.

The Big Rivers utility, which gets 70% of its revenue from Hawesville and Sebree, opposes the legislation, saying long-term contracts protect companies from wild swings in spot prices and would push up rates for its remaining customers.

Still, negotiations for power deals continue with both Century and Rio Tinto even as Kentucky’s House considers the energy bill. Even if it passes the House, the bill would need approvals by the state Senate and the governor’s office.

Century said in its testimony that it is committed to staying in Kentucky for the next 20 to 30 years, so much so, that it is in talks to buy the Sebree plant, which Rio Tinto deemed a non-core asset in late 2011. “The board is so strong (on Kentucky) that we’re in negotiations presently to buy the neighboring plant, the Sebree plant from Rio Tinto Alcan,” John Hoerner, vice-president of North American operations for Century, said last month.

Rio Tinto Alcan’s spokesman has said the company is exploring all possible options for Sebree, but declined to comment on Hoerner’s statement.