Alcoa officials were concerned about the viability of Ferndale’s Intalco Works plant several months before the November layoff announcement that likely will cut jobs for 465 people.
In March, the aluminum company sent the Bonneville Power Administration a notice that it was exercising its right to terminate its 10-year energy contract as of March 31, 2016, according to BPA documents. At the time Alcoa didn’t have the right to ask for a reduction of energy to buy from the BPA, so it made the decision to submit a one-year termination notice, said Mark Miller who worked on the Alcoa contract for the BPA.
Alcoa listed reasons to terminate the agreement that were very similar to the reasons it gave on Nov. 2 when it announced the curtailment of Intalco’s smelter in the first quarter of 2016: Market conditions were very challenging because aluminum prices were at historic lows, so the decreasing revenue and rising costs were hurting operating margins.
Instead of terminating the agreement, Alcoa and BPA began talking about alternatives, and one emerged that temporarily worked for both sides: BPA would allow Alcoa to reduce its energy purchases to 75 megawatts an hour instead of 300, allowing the aluminum company to purchases less expensive energy on the market.
“The decision to reduce the volume of power from BPA was based on the fact we could secure more competitive power from the market,” said Josh Wilund, a spokesman for Alcoa. After the amendment was finalized, “market conditions continued to worsen and that led to the curtailment decision,” Wilund said.
After the Nov. 2 announcement another agreement was completed in which Alcoa’s obligation would be reduced to purchasing 10 megawatts an hour for 18 months to power Intalco’s casthouse. The casthouse makes specialty items and is expected to employ around 118 people.
Long-term contract still in place
With this reduction in power, BPA and Alcoa still will have the 10-year contract in place, which means Alcoa still needs to give 12-months’ notice to terminate it. Alcoa could increase its power purchases if global market forces dramatically improve in the next 18 months, but it would need to BPA’s approval first, Miller said.
The negotiations were done with the goal of keeping Alcoa as a long-term customer, according to the BPA.
“We think Alcoa is a good business partner and we’re hopeful this will lead to a restart,” said Mike Hansen, a spokesman for BPA.
Whether the contract will stay active until it expires on Sept. 30, 2022, is unclear. Aluminum prices continue a steady decline as the oversupply of aluminum continues to weigh down the market. The price of aluminum at the beginning of December was $1,441.50 a metric ton on the London metal exchange, down about $60 from a month earlier.
A recent Bloomberg article suggested that the price of aluminum needs to be at $1,500 a metric ton for U.S. smelters to break even. Also, Alcoa isn’t cutting back on as much aluminum production after deciding not to idle one of its New York smelters. Alcoa changed its mind with the New York smelter after reaching a deal with that state to get $68 million in incentives.
$35 million Amount Alcoa is expected to spend on capital improvements to Intalco between 2012 and 2019. While those improvements will slow during the upcoming curtailment, Alcoa spokesman Josh Wilund said the company expects to meet that obligation.
At the time the 10-year contract power deal was signed at the end of 2012, there was a sense of relief for workers and the community that after years of dealing with power price spikes, some stability was finally coming to Intalco.
“You can have a great Christmas because we’ve got 10 years ahead of us and, we hope, a lot more,” Alcoa executive Bob Wilt said at signing ceremony on Dec. 7, 2012.
The original deal called on Alcoa to invest $35 million in capital improvements between 2012 and 2019 to keep the contract in place. Wilund said capital improvements are normally less than they would be when fully operational, but Alcoa expects to meet its obligations over the term of the contract.
No price drop for other customers
The reduction of power being bought by Alcoa won’t have a dramatic impact on prices for the industrial or residential BPA customers, said Hansen. The company’s rates are set every two years, with the most recent rate set in October. The current rate took into account the reduction of Alcoa’s purchase reduction from 300 megawatts to 75 megawatts. A variety of other factors are considered when setting the rate for the nonprofit agency, including its budget and expected demand from other customers.
The reduction from 75 megawatts to 10 megawatts is not large enough to warrant any changes to the current rate, Hansen said.