Century needs comfort margin to restart Ravenswood smelter

Century Aluminum's lawyers say that if the company's Ravenswood smelter reopened with special electric rates, the worst-case scenario would be ongoing low aluminum prices.

"Let's say aluminum prices never go above $1,800 a ton for 20 years," said Tom Heywood of the law firm Bowles Rice McDavid Graff & Love, which represents Century. "Statistically, that's remote to the point it will not happen."

However, "to the extent you tie the price Century pays for electricity to the price of aluminum, the biggest risk everyone would face would be a low aluminum price over an extended period of time."

Last week Century asked the state Public Service Commission for an electricity rate structure tied to the price of aluminum that could require Appalachian Power Co.'s nearly 500,000 other customers to pay a subsidy when the metal price is low.

Aluminum was trading Thursday for about $1,994 a metric ton. A year ago the price was $2,511. Company executives have said Century needs a price above $2,000 to reopen and operate the smelter.

Century will present an independent expert witness that, based on sophisticated financial modeling, forecasts an aluminum price of more than $2,450 a ton over a 20-year period, Heywood said.

What lies behind Century's proposal "are two realities — that aluminum prices are volatile and they increase over time," he said. "That's why so many smelter electricity rates around the world are priced with this in mind. You have this challenge and electricity is such a big component of a smelter's cost.

"What's viewed here is a smoothing and banking mechanism," Heywood said. "We do know that right now we're at the low end of the scale in terms of what makes sense in terms of a long-term investment. But over the next 10 years — the life of the special rate — we show a significantly higher price.

"We anticipate that in the early years there might be some initial support from other ratepayers. But we hope to demonstrate in these proceedings that over time it should be a wash, based on reasonable assumptions."

In testimony filed with the Public Service Commission last week, John Hoerner, Century's vice president of North American operations, said the company wants a rate that will allow it to recover its costs, "which includes a minimally acceptable margin" of $200 a ton.

Hoerner said, "In my experience, working for several different aluminum companies throughout the world, a company in the primary aluminum business — with other opportunities at other locations — would not restart and commit to operate a smelter of Ravenswood's age and type without earning a margin on its production.

"Simply put, Century will not restart Ravenswood — nor in my judgment would any other owner restart a comparable facility — without a margin of at least $200/MT (metric ton)."

Heywood said Century is not asking for a guaranteed $200-a-ton profit but it "is the basis of our modeling.

"To make the business decision to restart, we need to have a model assumption of this level of return. But actual experience will differ from that. There's no guarantee we would make money" at the proposed special rate.

"No one would do this with a break-even scenario," he said. "The notion is, you want some return on your investment. The minimally acceptable range would be $200 a metric ton in the context of deploying this much capital, making this sort of commitment."

Century has said it will cost $90 million to restart the smelter, which shut down in February 2009 after the economy went into recession and the price of aluminum fell. The smelter had 674 employees when it previously operated at full capacity.

James Kelsh, who is working with Heywood for Century, has said that the company "is working energetically to restart one of its four potlines in the fourth quarter of 2012 with the other potlines to be restarted sequentially in the first half of 2013."

Kelsh said the plant will employ about 421 people when the first potline is restarted and will have about 471 employees when all of the lines are back in production.

Century says it must have a special electricity rate for it to re-start the smelter. The Public Service Commission has set a schedule that could result in a decision by the end of August.