CRU Aluminum: US Production Nightmare Goes From Bad to Worse

Century Aluminum announced on June 24 that it would be immediately curtailing production at its Hawesville, Ky., smelter due to a tripling of power costs to run the operation. The company served layoff notices to 628 workers and began a full, orderly shutdown of the smelter, which had been producing 195,000 metric tons per year of primary aluminum.

Century had been sourcing its power from the Indiana Hub spot market and those prices have soared in the past month, reaching over $200 per megawatt hour (MWh). Historically, these rates had been running well under $50 per MWh, so this run-up in spot prices was financially devastating to the company.

On the heels of the Century news, Alcoa announced on July 1 that it was forced to curtail one of its three operating potlines at its Warrick (Evansville), Ind., smelter. Alcoa citied “operational challenges” for the decision to idle 54,000 tons per year of capacity. It is speculated that labor shortages were contributing to an inability to ensure potline stability.

More Closures Could be in the Making

Century operates a second large smelter at Sebree, Ky., producing over 220,000 metric tons per year of aluminum. This smelter also is the largest domestic producer of extrusion billets, which are used for aluminum extrusions.

Sebree is also sourcing its power from the spot power market like Hawesville. Therefore, it could also fall victim to the same difficulties with sky-high power prices. Sebree’s production of higher revenue products, such as billet, may be buying it some time, but that is not likely keep them afloat indefinitely.

The recent decline in London Metal Exchange prices, coupled with the downward drift in Midwest premiums and spot power is also making life exceedingly difficult for other smelters in New Madrid, Mo., and Mt. Holly, S.C. These smelters have a combined production of 340,000 metric tons per year.

Where Does This End?

Power is again the culprit, and those prices may not ease until the peak summer cooling season passes in August. Even then, despite lower demand pull for electricity, the elevated energy prices may keep the Indiana Hub prices high. Currently, forward quoted prices for December 2022 have the Indiana Hub at $85-88 per MWh. These prices are still well above levels that allow profitable smelting.

It is conceivable that the smelters in New Madrid and Mt. Holly could be vulnerable to curtailment.

The confirmed closures of Hawesville and Warrick take 249,000 tons per year out of the market. If we lose New Madrid and Mt. Holly in totality, the total loss of production rises to 589,000 tons or about 65% of US operating capacity.

The US has been and will continue to be structurally deficit on primary metal. These actual and potential closures only aggravate the situation.

The most immediate effect is that it stops the recent decline in Midwest P1020 premiums, which have fallen from $0.40 per pound over LME cash to around $.030 per pound.

Misery Loves Company: The Beer Institute Asking for an End to Section 232 in Aluminum

If Century Aluminum did not have enough challenges with its power costs, now it must contend with a new threat to its revenue stream.  The Beer Institute (representing Anheuser-Busch, Constellation Brands, Heineken and Molson Coors) has written President Biden about the $1.4 billion in aluminum tariffs it has paid under Section 232. In the letter, CEOs from the major beer companies contend that Section 232 is a highly regressive tax placed on the brewers and their customers. They close their letter suggesting that: “As your Administration continues to look for ways to relieve the pressures of inflation, we strongly urge you to look at the unintended consequences of Section 232 tariffs on aluminum.”

Frankly, we are surprised that the beverage industry, along with autos and other big end users have not weighed in against Section 232 before now. They are the ones shouldering the effects of the duty.

Does this mean that the days of the Section 232 aluminum tariff are numbered? We are not convinced. The Biden Administration is considering lifting duties on Chinese goods entering the US to curb inflation. The Beer Institute’s arguments are well-timed to appeal to this same logic. However, it is horrible timing for Century, facing huge power cost increases and threats to its two remaining operating smelters.

The question is whether the Biden Administration will seek to appease beer drinkers or smelter workers. They are caught in a tricky situation.

Biden plays hard to the union vote. Century has the United Steelworkers in Hawesville and Sebree. 628 people were laid off at Hawesville and Sebree employs the same number.

However, beer drinkers would seem to have the edge by the numbers:

     • 65% of Americans drink alcohol, and those that do say beer is their beverage of choice (39%)

     • Americans consume 28.2 gallons per year (Source: The Beer Institute)

Biden needs a win on inflation, and he may want one ahead of the mid-term elections in November.   However, one thing working against The Beer Institute is the plunge in aluminum prices from earlier in the year.

The LME price is off 40% from its highs ($2,400 versus $4,000) and Midwest physical premiums are down 25% ($0.40 versus $0.30 per pound). That is deflation with a capital “D.”

Century may still carry the argument to keep the tariffs in place until it finds a way out of its power cost nightmare.

By Greg Wittbecker, Advisor, CRU Group, Gregory.Wittbecker@CRUGroup.com

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