CRU Aluminum: INTALCO and Why a National Energy Policy Is Needed

In April 2020, Alcoa announced its decision to close its Ferndale, Wash., primary aluminum smelter known as INTALCO. This smelter was built in 1966 by the French aluminum giant, Pechiney, and at its peak produced 284,000 metric tons per year. In recent times, it had been operating at a reduced rate of 188,000 metric tons per year before being closed in July 2020. Alcoa cited excessive cost and low profitability as its rationale for the closure.

Blue Wolf Capital to the Rescue?

Almost immediately after the announcement of Alcoa’s decision, New York investment firm Blue Wolf Capital offered to buy the plant and sink substantial capital into the operation. Blue Wolf promised $50 million for initial restart and another $175 million for modernization.

Blue Wolf has broad bi-partisan political support, President Biden’s approval, and the Department of Energy backing it. They have the support from the local Machinist Union and even the Sierra Club has gotten behind the effort. However, the deal is stalled because competitively priced, long-term power is still elusive. A bit of history is required to understand the current dilemma.

Bonneville Power Authority (BPA) and the Deregulation of Electricity Change Changed Everything

The BPA historically supplied power to numerous smelters in the Pacific Northwest dating back to 1939, when it signed its first deal with Alcoa to facilitate the construction of their Vancouver, Wash., smelter. Eventually, nine other smelters were built with regional production peaking at nearly 1.8 million tons. These smelters were supported by long-term, fixed-rate power deals which bypassed the local utilities. Those sales made sense in that era. BPA was generating surplus power through 31 hydroelectric dams and its Hanford, Wash., nuclear plant. Aluminum smelters provided the ideal “base load” to help balance the system.

That all changed when Congress passed the Energy Policy Act in 1992, allowing utilities to compete for customers and to serve customers not in their local service areas. In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888, which required transmission utilities to open their transmission grids to allow “wheeling” of power from generators to other markets. California deregulated its electricity market in 1996, and the rush to free market retail pricing was on. It also was the beginning of the end of the aluminum smelting industry in the Pacific Northwest.

The deregulation of power pricing, and the ability to wheel power to California changed BPA from a surplus generator of electricity to one barely able to meet demand. Power-hungry California took all the power BPA could supply at premium prices to satisfy a retail market that was relatively price inelastic (i.e., “just keep the lights on and the economy humming”).  In 2001, BPA had a 3,000-megawatt deficit in power demand versus its generating capacity. Who suffered? The aluminum industry and any other electricity-intensive sectors. Those ten aluminum smelters operating in the region became one when INTALCO met its fate in 2020. We also lost the Alcoa Addy, Wash., primary magnesium smelter in 2001, which leaves the US with one remaining producer in Utah today.

Fast forward to 2022 and BPA still has more demand than generation capacity. It also must deal with a legacy of mismanaging massive capital projects over its history and Congress being extremely wary of entrusting more federal capital to it for new capacity. Today, INTALCO must compete against server farms and crypto miners that consume as much electricity as a smelter. Little-known fact: one crypto coin requires 2,000 kilowatts of electricity to run those massive computers solving the algorithms for “production.” Six coins = one metric ton of aluminum. Tough demand competition for INTALCO.

Section 232 Represented a Missed Opportunity To Address the Energy Problem for Aluminum

Section 232 has produced mixed responses within steel and aluminum.

The steel industry has taken advantage of the import duties and pricing environment to aggressively build new EAF capacity, which you are aware of. The aluminum industry managed to revive some idled capacity in Kentucky (Century Aluminum), Missouri (Magnitude Seven), and South Carolina (Century). But aluminum has plateaued its production at around 1 million tons, up from 800,000 tons pre-Section 232. We have seen INTALCO close, and Alcoa keep 60% of its Warrick, Ind., coal-fired smelter closed. Magnitude Seven has 33% of its remaining capacity at New Madrid shut, citing big capital requirements to rebuild its carbon plant to support the anode needs of the third line. There is NO talk of greenfield investment.

Yet, we continue to run a 4-million-ton deficit of primary supply. Approximately 60% of this is being met by Canada, and the balance is coming in from Australia, Argentina, India, and the Middle East. Thankfully, Russia has NOT been a major contributor since the 2018 sanctions, supplying only about 5% of our needs.

When Section 232 was put into place, the logic was to preserve and nurture the US primary aluminum sector. We are now four years into this experiment, and progress has stopped. This situation must be especially maddening to Blue Wolf, which has said it will spend the capital to bring INTALCO back to life and help boost US production.

A Path Forward

The US Treasury has been collecting 10% import duties on approximately 1.5 million tons of aluminum per year since 2018 coming from non-exempt countries. Canada, Australia, and Argentina are exempt on 2.5 million tons of that deficit mentioned above. That revenue stream conservatively represents $330 million per year to, recently, as much as $450 million. These revenues have disappeared into the federal deficit. This does not begin to account for the revenue from the 25% steel duties.

You must ask, “Wouldn’t it have been great if that money would have been directly allocated to the steel and aluminum sectors to boost their competitiveness and capacity?”

It is tempting to say, “Why didn’t they take the revenues and subsidize power rates for steel and aluminum to enable new production?”  That seems obvious, but under World Trade Organization (WTO) rules, this kind of direct state aid is prohibited. Instead, the US will have to be more creative in helping solve the power cost problem for INTALCO and others. It might look at:

• Increased investment tax credits (ITC) for more renewable power capacity to bring down price points
• Loan guarantees for companies investing in energy efficient upgrades
• Fast track FERC approvals of interstate transmission lines to allow easier movement of surplus power to deficit regions
• Eliminate cumbersome state Public Service Commission (PUC) approval process for new grid investment or upgrades to aging grids to facilitate faster and cheaper wheeling of power to the likes of INTALCO
• Consider caps on power allocation to crypto mining. Countries like China are already asking crypto miners to leave as they do not consider them as adding real value. This is clearly a radical idea, but someone needs to determine if this emerging sector is really creating tangible value. Bill Gates has recently said he considers crypto to be a “sham.”

There is no easy answer to cracking the code for getting INTALCO back, but the market is calling out for a comprehensive national energy policy or investment-friendly tax policy that stimulates industrial investment. Any economy that wants to be sustainable must “make things.” We need to find a way to allow INTALCO to make aluminum, along with continuing to encourage the growth in EAF steel. Kudos to steel for taking the steps to do that.

For more information about this topic, contact the author gregory.wittbecker@crugroup.com.

Learn more about CRU’s services at www.crugroup.com.