Smelter talk more like smegma talk

Last October a federal briefing note prepared for incoming natural resources minister Lisa Raitt listed an aluminum smelter in Labrador as one of 14 projects expected to be announced within six months.

Unfortunately for the people writing the briefing notes, the proponents – Rio Tinto Alcan – were busily chopping production globally in response to the economic meltdown.

The briefing note story is in the Saturday Telegram along with some choice recent history of the smelter story.  It isn’t on line.

As the Telly notes, the Premier traveled to Brazil in late 2007 to pitch the smelter idea to vale Inco. 

A year later the government’s favourite economist was touting the idea of an imminent announcement of what – as we told you at the time – was supposed to be an aluminum smelter. 

The project would, as the Telly quotes Wade Locke, “make the earlier start of the project [Lower Churchill] more viable and …act more like a loan guarantee for the Lower Churchill that will allow them easier access to capital.”

Nice thought, that, except that reality was intruding on the fantasy even as the words were being uttered or the briefing notes being drafted. Major aluminum producers were busily shedding capacity through the fall of 2008 and early winter of 2009 as demand plummeted.

The problem for Australian-based Rio Tinto was a bit larger.  The miner completed its purchase of Alcan in late 2008 and took on responsibility for the company’s $40 billion net debt problem, as a result.

Plans to shed some assets melted in mid October. Since then the company has announced plans to chop 14,000 jobs globally – 12.5% of its workforce – and has slowed production by as much as 22% in some aspects of aluminum production. In February, Rio Tinto announced a deal with Chi Nalco, a state-owned enterprise, to allow the Chinese to farm into several existing Rio ventures, including bauxite and aluminum projects in the Pacific.

The company’s capex plan for 2009-2010 reduces expenditures in 2009 by 50% and sets the level for 2010 at sustainment.  in other words, for the next two years the company is not anticipating any significant capital expenditure.  On top of that, the company has already reduced production  especially in some its high-cost operations.

The Chinese deal suggests not only that the company is welcoming some fresh cash into the system but also is gearing to take advantage of growth in the Chinese market using facilities that are closer to the market than Labrador. 

For those who don’t know, Labrador is pretty much as far from China as one can get.  All the raw materials for a smelter would have to be imported and the power would have to be sold at incredibly low prices – well below current market rates in Labrador – in order to offset the production and shipping costs. That’s almost identical in concept to the Smallwood-era phosphorous plant at Long Harbour.  The project was only viable because of its low energy costs (initially the same rate as sales to Hydro Quebec from Churchill Falls) and its proximity to its major market in the United Kingdom.

Similar aluminum projects in Iceland involved selling power at half the rate for other commercial users.

The Quebec government provides massive subsidies to its aluminum industry but that hasn’t stopped recent shutdowns and layoffs.

The idea of establishing an aluminum smelter in Labrador dates back to the 1950s.

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Rio Tinto responds to aluminum downturn

Via company news release:

Rio Tinto Alcan today announced it will slow the construction of the Yarwun alumina refinery expansion in Gladstone and curtail annual bauxite production at its Weipa mine to 15 million tonnes (from 19.4 million tonnes in 2008) due to the sharp fall in alumina and aluminium demand and prices in recent months.

Announcing the decision, Rio Tinto Alcan Bauxite and Alumina president Steve Hodgson said the depressed state of the market and a sharp cutback in demand made further tough decisions necessary.

 

Someone needs to ask Wade Locke about that great big gi-enormous project that was supposedly coming any day now to Labrador.  Hint:  it was an aluminum plant.

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Aluminumania!

Oh yes, there'll be a smelter for sure in Labrador.

Aluminum prices hit a three year low.

Perfect time for a company to hit up a willing government for some Valdmania cash.

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Put on your tinfoil hats

ALCOA, the company that retained a lobbyist for two years on the Lower Churchill project, is slashing another 350,000 tonnes from its production in light of declining global demand for aluminum.

That brings the total ALCOA reduction to 615,000 tonnes this year, or 15% of the company's total production capacity.

Rio Tinto is reconsidering an $11 billion project in Saudi Arabia and Vale is also cutting output. 

Aluminum prices have plummeted by more than 40 per cent to around $1,995 a tonne on the London Metal Exchange since July as demand from industries as far afield as aerospace and soda cans has shrivelled up.

Inventories held in LME warehouses have ballooned to 1.55 million tonnes, equivalent to more than half the yearly output of Australia, a major supplier.

“Cuts, such as the one by Alcoa, and the Chinese stimulus package, could help the market, but it will take time to work off the massive inventory build-ups,” Investec Resources analyst Darren Heathcoate said.

All of this pretty much makes speculation about an aluminum smelter for Labrador seem pretty far fetched.

Well, far fetched to people who aren't wearing tin foil hats.

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First, we assume a smelter...

that might possibly lead to making stuff to make cans that we can assume a can-opener to use on.

Take a deep breath.

We are now in a world where we are not starting a project by assuming a can-opener.
And really we are not even assuming a can.

Nope.

Now Memorial University economist Wade Locke is going beyond his prediction that the provincial government may post a surplus greater than predicted last spring to say he thinks there'll be a major economic development announcement for Labrador shortly.

Now we are fantasising about a plant to make to stuff to make the cans out of.

Speculation centres on an aluminum smelter and Locke's cheshire cat grin in an interview with CBC sure fueled the idea that some company - possibly Vale Inco - will be making the announcement related to the Lower Churchill.

Take another deep breath and let's look at what we know - as opposed to what is pure speculation.

1. The provincial budget will very likely be in deficit on a cash basis and if things financial keep going south, the $544 million surplus forecast on some other basis would also be tough - if not impossible - to achieve. Let's see how close Locke comes on that prediction before we accept the megaproject one.

2. The only Newfoundland and Labrador project - the ONLY project - in Vale's 2009 capex announcement in mid October was the Long Harbour smelter. There's no mention at all of an aluminum project or anything else vaguely like it for Canada.

3. To make it even more unlikely there's a real smelter project in the works from Vale, the company's capex commitment gives Vale's strategic view:

Vale’s strategy for the aluminum business is focused on the organic growth of upstream assets, through the development of its high quality bauxite reserves and the very efficient low-cost alumina operations.
As recently announced, we will build a new alumina refinery, Companhia de Alumina do Pará (CAP), and expand our Paragominas bauxite mine (Paragomias III), both located in the Brazilian state of Pará.

CAP will be responsible for the implementation and operation of an alumina refinery, located in Barcarena, close to the alumina refinery of our subsidiary Alunorte. CAP will be 80% owned by Vale, and 20% by Hydro Aluminium. [Emphasis added]

The initial production capacity of the refinery will be 1.86 Mtpy of alumina, through two lines of 930,000 tpy each. The new refinery has potential for future capacity expansions up to 7.4 Mtpy.

4. How do you spell massive subsidy? Aluminum smelters need huge amounts of cheap power. Lower Churchill power would not be cheap unless the provincial government agreed to sell the power over the long term at or below production costs.

Quebec uses its considerable generating capacity for power from plants that are already paid off to help subsidize aluminum enterprises in that province.

Critics point out that it would far more beneficial to export the cheap power for profit than subsidize aluminum plants.

It's not like the trend has been to build aluminum plants as far from possible as markets.

5. Even if by some chance a project is announced, it's construction would be tied to the Lower Churchill which itself remains a dodgy proposition. Lack of confirmed long-term sales contracts and the current economic downturn have put that project further in doubt.

6. Even if we are talking about an announcement, it would be for a project that, in the most optimistic scenario wouldn't be built and operating until closer to 2020 than not.

7. It's the November poll goosing season. Put that together with Locke's actual comment quoted by CBC and you have the sort of overblown hype coming from insiders that we've usually seen about the Lower Churchill project since 2003:

"There are significant projects being considered, energy intensive ones for the province that will make the earlier start of the project more viable and it will act more like a loan guarantee for the Lower Churchill that will allow them easier access to capital," he said.

Projects are being considered.

That doesn't mean they are confirmed.

The rest of the comment likely reflects the view inside the Premier's Office on what sorts of financial daisy-chains are necessary to keep the $9.0 billion project alive, at least in the minds of its proponents.

Of course, that doesn't mean that even the Lower Churchill is as likely as Locke claims.

After all, it's not like the Premier has refrained from hyping a dead dog before when it suited his purposes.

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Avoiding other people's mistakes

There's a compelling point in the middle of this 1991 article from the Montreal Gazette: "... Hydro-Quebec is losing in a big way by selling its electricity so cheaply to big companies rather than exporting it for a much higher price."

The economics of hydro-electricity and industrial development haven't changed in the past 30 years even if the price per kilowatt hour fluctuates. The consistent policy of successive governments in Newfoundland and Labrador - including the current administration's plans to develop power for export makes sense.

The province has a commodity others need. As long as the prices are good, the provincial energy utility can develop and sell power to other places far more profitably than if it tried the Quebec approach or the Icelandic approach of providing massive subsidies to establish industry solely for the purpose of creating jobs.

As economist Jean-Thomas Bernard calculated, the Quebec government would lose about $300 million per year over 20 years as a result of its aluminum smelter policy. Bernard and Gerard Belanger, his colleague at l'Universite de Laval, repeated the same analysis of agreements for aluminum smelters signed in 2007 by the Quebec government. They concluded that in exchange for a $2.0 billion investment and 740 jobs, the Quebec government will forego $2.7 billion over the course of 35 years.

The experience of other provinces should give us pause.

Drawing our water and giving it away
Hydro-Quebec losing big by selling cheap electricity to aluminum patch: critics

Bertrand Marotte
The Gazette
Montreal, Que.
Apr 27, 1991.
Page B.4


They didn't come for the view. The Japanese, European and U.S. interests that decided to set up or expand aluminum operations along the St. Lawrence River valley in Quebec were lured with cheaply priced electricity, courtesy of utility giant Hydro-Quebec.

Today, giant smelters sprout from Trois Rivieres to the Lower North Shore in a concentration known as Aluminum Valley.

It may not have the same high-tech, high-dollar mystique as its silicon counterpart in California, but the aluminum patch is a keystone of Premier Robert Bourassa's economic strategy.

This veritable boom in Quebec's aluminum production is closely linked to plans for a series of giant new hydro-electric developments in the northwestern part of the province - including the controversial $12.6-billion Great Whale project.

Contracts are secret

Aluminum smelters devour electricity like no other industry - up to 30 per cent of their production costs - and Hydro-Quebec offers them a guaranteed supply, often over a 20- to 25-year span.

The smelters buy the electricity at a price that is tied to the roller-coaster price of aluminum on the spot market.

Hydro-Quebec, in other words, offers a "risk-sharing" program to the aluminum companies, as well as to other high-energy users that make primary products, like hydrogen and magnesium, said spokesman Richard Aubry.

But no one is allowed to know how much Hydro-Quebec receives for the cut-rate electricity it supplies to 13 outfits, including the four new aluminum smelting operations along the St. Lawrence.

Recent revelations in the national assembly and at a televised news conference broadcast from the United States have shed light on some of the prices, but the contracts remain secret. Hydro-Quebec, the provincial government and the companies involved have all been blocking attempts to make that information public.

Critics, including the Cree Indians whose land will be flooded once again if Great Whale and other projects go ahead, say one of the reasons Hydro-Quebec needs the new projects is to make up for the revenues lost through contracts that are far too generous for big energy users.

Net loss to Quebec

Jean-Thomas Bernard, economics professor at Laval University and an expert on the economics of hydro-electricity, says such a criticism would be hard to prove.

But Bernard agrees Hydro-Quebec is losing in a big way by selling its electricity so cheaply to big companies rather than exporting it for a much higher price.

It is believed the aluminum companies and others with special commercial contracts pay less than 2.6 cents per kilowatt-hour, compared to more than 6 cents per kilowatt-hour that is charged on export contracts to the United States.

Hydro-Quebec insists the income from the special commercial contracts averages about the same as amounts earned from the higher rates it charges its regular industrial customers - about 3.5 cents per kilowatt-hour.

Quebecers in no way subsidize those contracts, Aubry said.

Bernard, however, estimates that the new aluminum plants will result in a net loss to Quebec of about $300 million per year, over 20 years.

And because aluminum smelters employ so few people, Bernard said that Bourassa's job-creation argument is also shaky.

Each new job created in aluminum smelting will represent a hidden government subsidy of $150,000, Bernard figures.

There are also the environmental costs.

Ingots shipped elsewhere for manufacturing

Aluminum smelting is one of the most polluting industrial activities, and although the new generation of plants are cleaner, they are far from being totally non-polluting, said environmentalist Daniel Green of the Montreal group Societe pour Vaincre la Pollution.

Quebec gets little in the area of advanced manufacturing from the cut-rate sales.

Once the primary processing is done, the aluminum ingots are shipped from the province, where they are transformed into a host of different products.

There was hope for at least one important new aluminum manufacturing plant in Quebec, but that has been killed.

Reynolds Metals Co. of Richmond, Va., which owns Canadian Reynolds Metals Co. of Baie Comeau, reneged on a promise to build a $50- million plant near Montreal that would have produced 750,000 aluminum wheels a year, opting instead for the already rich industrial heartland of southern Ontario.

Says one aluminum analyst: "Quebec is really competing with places like Venezuela and Brazil, which also offer cheap hydro, and cheap oil.

"We are still hewers of wood and drawers of water, but why not?"

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