US aluminium industry ponders case for building new smelter

Interest in building a new primary aluminium smelter in the United States appears to be growing among some in the industry, largely due to the 10% tariff on imports of the product signed by President Donald Trump last month.

There is growing sentiment in the US that a new smelter can and should be built – and the idea is attracting interest from others in the industry, one market participant told American Metal Market on Monday April 2.

“I want to be a part of larger efforts with savvy stakeholders interested in maintaining and creating high paying manufacturing jobs in the US,” according to Subodh Das, president and chief executive officer of environmental consultancy Phinix LLC.

The 10% tariff would be a strong part of any effort to build a new smelter since it would likely shield US players from unfair Chinese competition, which has been an issue for primary producers for years, he said.

But other factors are making building a smelter more viable than it has been in a long time.

“Today is the best environment in 50 years to make this happen quickly,” Das said. “We have the money, market, technology and human/physical infrastructure already in place.”

Better technology, like Rio Tinto’s AP60 technology, might allow a new US smelter to be more efficient in its P1020 production than the older alternatives currently operating in the country. The newest smelter in the US is Century Aluminum Co’s Mount Holly smelter in Goose Creek, South Carolina, which was opened in 1980, according to Century’s website. AP60 cells produce 40% more aluminium than previous-generation technology.

A new smelter project is generally thought of a down-the-road target post-tariff, but rising P1020 premiums could push that schedule up.

The tariff could add an additional 20-25 cents per lb to the Midwest aluminium premium, bringing the premium to more than 30 cents per lb - an all-time high, independent analyst Lloyd O’ Carroll said in a research note late last month.

“Additional announcements may be awaiting developments on ‘carve outs’ and potential premium levels,” he said. “Further production announcements are likely to wait until the carve out/premium uncertainty outlook is better resolved.”

The Midwest aluminium premium has jumped more than doubled since the start of the year due to speculation about Trump’s eventual metal tariffs, hitting a nearly three-year high of 19-20 cents per lb in mid-March. But the premium has since retreated slightly, with American Metal Market’s assessment at 18.75-19.25 cents per lb on April 3.

Potential pitfalls
Even with the US aluminium industry's change in fortunes since Trump confirmed the tariff on aluminium imports last month, there are still plenty of ways in which a new domestic smelter would have a tough time competing with a foreign-based entity - not the least of which stems from current power costs in the US.

US industrial power costs rose throughout 2017, gaining 2.2% to 6.89 cents per kilowatt hour (kWh) from 6.74 cents per kWh the previous year, according US Energy Information Administration (EIA) data compiled by American Metal Market. The five states with the cheapest rates in 2017 were Washington (4.66 cents per kWh), Montana (5.13 cents per kWh), Oklahoma (5.27 cents per kWh), Louisiana (5.42 cents per kWh) and Texas (5.46 cents per kWh).

“I think power costs are the hang-up,” according to John Mothersole, director of research, pricing and purchasing service at London-based IHS Markit. “Unless you can get a long-term commitment at a low electricity rate, a greenfield/brownfield project doesn’t make sense.” 

Electricity prices would have to drop to match or move below spot gas pricing in order to get investors interested in a greenfield smelter, Century Aluminum president and chief executive officer Michael Bless said during an earnings call in February. Meanwhile, the company has been struggling to lock in competitive electricity prices for its Mount Holly smelter.

Natural gas might be the way forward to get past the issue of high electricity rates, according to Das.

“The US now is a major energy producer and exporter, with hydraulic fracking [developed in the US with Department of Energy funds] - there is an abundance of cheap natural gas,” he said.

But this might be easier said than done, according to Mothersole.

“There has been a lot of talk about a captive cheap gas-fired generation for a smelter,” Mothersole said. “But these discussions always seem to get hung up on financing. Would you lend money to build a gas-fired electric plant - only to have it sell the power cheaply to make aluminum - or would you rather sell it to a company hosting cloud servers? Where could you get the best return?”

Even if cheap electricity can be located, building a smelter fast enough to take advantage of current favorable market conditions is a steep challenge itself, with one market source noting that it would take a minimum of three years to build a greenfield smelter at a price of at least $1 billion.

Forward momentum
Despite steep costs being a significant barrier to building a new smelter there has been a resurgence in primary aluminium production in the US due to the tariffs, in the form of restarts of previously idled capacity.

Since Trump signed the 10% tariff on aluminium imports into law, two major smelters have announced restarts of previously curtailed capacity: Century at its Hawesville, Kentucky, smelter and Magnitude 7 Metals at its New Madrid, Missouri, smelter.

Other restarts could be in the pipeline. Alcoa Corp said last year that it was evaluating its smelting portfolio to determine if it would bring back any upstream capacity. The company curtailed a portion of production at its Massena West smelter in upstate New York in 2015 and has cut production at two smelters in Washington.

Additionally, Chinese supply-side reform is supposed to limit the country’s investments in new capacity – another factor curbing the flow of foreign primary aluminium to the US.

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