CRU Aluminum: Century Hawesville Curtailment, Another Casualty of Energy Volatility

When we wrote our column last week about INTALCO and the shortcomings of US energy policy, little did we know that we would see another example of this within a week.

On Wednesday, June 22, Century Aluminum (CENX) announced its intent to immediately fully curtail its Hawesville, Ky., primary aluminum smelter. The company cited “skyrocketing energy costs” and will begin closure of the plant on June 27 for a period of nine to 12 months.

Hawesville consists of 5 x 50,000 metric ton/year potlines, or 250,000 tons. They were operating at 80% of capacity, or 195,000 tons.

Century had been purchasing its power requirements from the day-ahead Indiana Hub market. Since 2018, that strategy has been an effective approach, as they have seen average weighted power prices remain reasonable. (Source: ICE via EIA.)

• 2018: $41.68 per MWh

• 2019: $38.85 per MWh

• 2020: $29.37 per MWh

• 2021: $58.08 per MWh

These prices, combined with LME prices that averaged $2,021 per metric ton and average Midwest physical premiums of $.1895 per pound created decent returns during 2018-2021.

That four-year cost and revenue alignment has dramatically changed recently. Day-ahead Indiana Hub prices have soared to over $200 per MWh.

This power price increase has pushed Hawesville into an untenable cash flow position, necessitating the full closure.

We can get some sense of the financial damage by considering the eventual restart costs that this closure will eventually impose. A typical restart of a smelter is around $200 per metric ton. So, Century faces about $40 million in restart costs whenever they decide to reopen. That $40 million represents about 10% of their adjusted 2022 EBITDA predicated on their Q1 2022 run rate of $105 million. That is a bitter pill to swallow.

What Does This Mean to the US and the Global Market?

The closure of Hawesville represents about 22% of US primary production. It means the US deficit gets proportionally bigger. It may have a marginal upside lift to physical premiums. But it will largely be ignored by the LME, which is still obsessed with the risks of recession.

Hawesville’s closure also represents a black eye for Section 232, of which Century was a big advocate.

Section 232 gave Century, along with Alcoa and Magnitude 7, a 10% revenue cushion to reinvest in and reinvigorate their domestic capacity. As we described last week, those efforts had stalled already. Now, we lose the largest single smelter operating in the US.

Section 232 Was a Band-Aid on a Chest Wound: No Energy Plan to Balance Retail and Industrial Demand

Both the Trump and Biden administrations share responsibility for failing to come up with an integrated strategy to solve the aluminum industry’s systemic problem of high-priced electricity.

Century’s need to go to the spot market resulted from frustration with their incumbent suppliers’ unwillingness to provide competitive power. Instead, these suppliers chose to take the easy path of selling into the retail consumer markets where demand is inelastic, and pricing is better. It is a one-and-done approach, where they collect short-term profits. When you can sell all the power you can generate at a handsome profit, you are not concerned with the bigger picture of longer-term industrial development where there might be an economic multiplier effect.

Century put 600 good people on the street because of their closure. Those people spend money and create secondary jobs in their community that likely return 4-5 times the direct payroll of the smelter. That multiplier effect is lost on utilities that enjoy more demand than they can service now.

We did note this week that Federal Energy Regulatory Commission (FERC) voted unanimously to update requirement generation interconnection, citing over 8,1000 active projects in queues waiting to be connected to grids. These projects represent over 1,000 gigawatts of renewable generation and 400 gigawatts of energy storage.

The EIA says 46% of all new utility scale generation in 2022 will be solar, followed by natural gas (21%), wind (17%), batteries (11%), and nuclear (5%). The sooner we get that capacity connected to the grid(s), the sooner companies like Century can find the supply they need at a price that allows them to compete.

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

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