Aluminum Smelters

Aluminum prices recently hit a 10 year high on the London Metals Exchange (LME), yet smelters across the world are struggling just to stay afloat. Norsk Hydro, the fourth largest aluminum producer in the world is shutting the doors at the end of this year on their Hamburg plant and by the end of 2006, will close down a second plant based in Germany. Alcan has shied away from a smelter project in South Africa and Alcoa is re-thinking the viability of smelters based in the states of Washing and Maryland.

While the price they can charge for the production of aluminum has skyrocketed, the costs to run these plants has risen even more, putting many of these smelters in dire financial straights. The end of long term energy contracts has so far been the catalyst for most of the shutdowns of smelters worldwide. As more and more long term contracts expire, this trend is expected to continue.

Aluminum production is one of the most energy intensive manufacturing processes that exist. China, which produces just 8% of the world's aluminum, uses over 4% of the energy of ENTIRE country to fuel approximately a dozen smelters. To ensure that these smelters have enough energy to continue operations, they buy long term energy contracts years in advance. As these contracts expire, many smelters would become unprofitable by purchasing energy at today's prices. Companies are often forced to shut down such ventures, or find alternative energy sources.

Over the next decade, a huge dichotomy will emerge among smelters worldwide. As many of the long term energy contracts expire at old smelters in places like the United States or Europe, they will shut down their doors in favor of building new smelters in areas where cheap energy is more readily available. Alcoa, which currently has over 80% of its aluminum production centered in the US, Spain, and Italy, plans to reduce this to around 50% in less than ten years. Work has already begun on a smelter in Iceland that will make use of the country's vast geothermal energy reserves. Alcoa has been so enamored with the possibilities, that a second smelter in Iceland is currently in the planning stages. They are also currently investigating the possibilities of building plants in the energy rich countries of Trinidad and Brunei, while Norsk Hydro is planning to open a facility in Qatar by 2009.

These smelters typically take around 3 years to build and cost in the area of one billion US dollars a piece. This is one way that a commodity boom in one area can cause a snowball effect for a country rich in reserves of oil or natural gas. The FDI needed to bring these smelters to fruition is large enough to build a small city, and may one day prove to be of huge benefit to poor, energy rich nations like Bolivia and East Timor. Energy is the single largest variable currently affecting the Aluminum industry, and will likely dictate who wins and loses in the game of aluminum production.