Updated 11 June. Is the announcement that the aluminum smelter at Columbia Falls will be shut down at the end of July in part a ploy to improve CFAC’s position as it negotiates power prices with the Bonneville Power Administration? That’s a fair question — and I think the answers are (a) yes, and (b) it won’t make any difference. The price of aluminum, which reached $2,968 per metric ton (tonne) a year ago, but fell to $1,338 in February, is on the rebound. If markets continue to improve, and if CFAC can secure electricity at a price that makes operations profitable, the plant could resume operations.
But those are two big “ifs” and I’m not optimistic about CFAC’s long term economic viability. Now operating at around ten percent of its capacity, accounting for less than one percent of the nation’s primary production of aluminum, the 55-year-old plant will shut down at the end of July. A spokesman for the plant, Haley Beaudry, prefers to say CFAC is “curtailing production,” not shutting down. CFAC, he said, hopes to negotiate a power contract that will allow the plant to stay open. Senator Max Baucus is lending his good offices to the effort.
I suspect it will stay closed. In fact, I’m surprised it stayed open this long: the world that allowed locating an aluminum smelter in Columbia Falls no longer exists. But even if CFAC secures a power contract to its liking and reopens the plant, I think the reprieve will be temporary. Even with a hefty subsidy — which means residential electricity customers will help bankroll CFAC’s profits — I doubt it can compete for long with giant, more efficient smelters overseas that are closer to raw materials, have much lower labor costs, and pay less for electricity. Hope may spring eternal, but economic reality ultimately governs.
When it began operating in 1955, the smelter accounted for around five percent of all the aluminum produced in the United States. In its heyday, the plant made almost a million pounds of metal a day, employed hundreds, and drew approximately 300 megawatts of electricity. It was a brutal place to work, but the workers, backed by their union, were paid well. Fueled by cheap electricity from Hungry Horse and other dams, it was one of the Flathead’s main economic engines. Had it closed in 1980, the economic damage would have been far worse than it will be if it closes now.
Cheap electricity was the key. In 1955, when aluminum sold for $522/tonne, the BPA was selling power at $0.00333 per kilowatt hour, and the Sodorberg cells probably required 20-21 kilowatt hours to produce one kilogram of metal. Electricity prices were no barrier to profitability.
As long time Flathead residents know, the Soderberg cells were notorious fluoride emitters. To satisfy clean air requirments, and to improve efficiency, the plant installed the Sumitomo process in the 1970’s, bringing emissions into compliance with air quality regulations, and extending the economic life of the operation. Further improvements have reduced electrical requirements to approximately 15Kwhr/tonne. And after the upgrades, the plant reached its ultimate annual capacity of 168,000 tonnes of aluminum ignots.
But students of the industry knew aluminum production in the Northwest had peaked and would decline. Cheap hydropower was disappearing. New smelters were being built elsewhere, where cheap labor and electricity were plentiful. By the millenium, the collapse of the Soviet Union and the rise of China — especially China — had tremendously increased the world’s available smelting capacity. In 1955, the world’s primary aluminum production was just under 2 million tonnes. In 2008, it was 36 million tonnes. And CFAC, now an industrial graybeard, accounted for less than four-tenths of one percent of the world’s production capacity.
At this point, the capital costs of the plant are sunk and the equipment probably has little or no salvage value. Labor, alumina, and electricity are the major production costs. As long as the equipment functions, the plant can operate. But electricity, even subsidized, is no longer cheap. The current national average for industrial customers is $0.0698/Kwhr (residential customers pay $0.1123/Kwhr). (For purposes of comparison, China’s Guangxi aluminum smelters pay around $0.05/Kwhr and have much lower labor costs.) At that price — which may be subsidized by $0.027/Kwhr — electricity costs CFAC as much as a thousand dollars per tonne of aluminum metal. Add labor and alumina and the balance sheet is written in red while metal prices are low.
Even another sweetheart deal on electricity might not be enough to keep the plant operating. It’s far from sources of raw material, far from markets, and less efficient than the newest plants. Swiss based Glencore AG, CFAC’s owner, might decide that even if CFAC could operate at a profit, Glencore’s money could be more profitably invested elsewhere. Which is the outcome I expect.