Alcan Treads Fine Line With Hydro Supply

By Reprint with Permission

The following article was originally published in the Globe and Mail it is reprinted here with permission: 

 by KONRAD YAKABUSKI
 Globe and Mail

All this time we thought Alcan was an  aluminum producer, when it turns out it’s really just a gold digger.

Alcan may be a member of a newly endangered  species -- the widely held, Canadian-based mining  company -- but it’s hard to feel patriotic about  a multinational whose ability to extract  subsidies from governments makes Bombardier look  like a hapless amateur.

Like Bombardier, Montreal-based Alcan is so much  a part of Canadian folklore that, growing up,  many of us first heard about it in our primary  school French classes. We learned that Arvida was  a town in Quebec where tout le monde travaillait
pour Alcan, which brought in bauxite from South America and turned it into aluminum. We were  supposed to be très fiers, or proud, of this  Canadian world beater, just as we were to be  tickled to know that New Yorkers rode  Bomber-built subway cars to work.

What the French textbooks didn’t tell us was that  governments of the day gave Alcan huge chunks of what has become one of our most valuable  resources -- our hydroelectric potential -- in  exchange for promises of industrial development.  And what they couldn’t tell us is that we’d  probably live to regret it.

Take Alcan’s announcement Monday that it will  invest $1.8-billion (U.S.) to modernize and  expand its aluminum smelter in Kitimat, B.C. More  than 50 years ago, the British Columbia  government gave Alcan the right to reverse the  flow of the Nechako River, flooding thousands of  hectares of land, to build a hydroelectric  station. The so-called Kemano project was to
generate about 900 megawatts of electricity  exclusively for use in aluminum smelting. Using  the cost-benefit tools of the day, the jobs and  export revenue appeared to make it a good deal  for B.C. taxpayers, especially since no one in  1950 ever contemplated the emergence of a  continental electricity market. In other words,  if Alcan didn’t use the power, no one would.

In recent years, however, Alcan has been cutting  more and more of Kitimat’s aluminum smelting  output, freeing up power and selling the surplus electricity at market prices. Kemano, whose costs  were long ago amortized, produces electricity at
about half a cent per kilowatt hour. Depending on  where you live, you know that you’re paying at  least 10 times, but more like 20 times (Hello,  Toronto), more for the electricity you consume.  So, you have an idea of the profit Alcan reaps by
selling the surplus power, especially during  peaks of energy consumption, instead of using it  to produce aluminum, the price of which -- while  currently very high -- remains cyclical.

For years, a coalition of Kitimat politicians,  led by Mayor Richard Wozney, has maintained that  Alcan is violating its half-century-old,  power-for-jobs pact with the B.C. government.  Unfortunately, Monday’s announcement of an  expansion of the Kitimat smelter shows Premier  Gordon Campbell has succumbed to the gold  digger’s charm.

Alcan will increase the capacity of the Kitimat  smelter to 400,000 tonnes from 275,000 tonnes.  While that sounds good, it’s much less than the  550,000 tonnes that could be produced using  Kemano’s output. In fact, the more modern plant  will use a third less electricity per tonne of  aluminum produced. It’ll be so efficient that  employment will drop from 1,550 to 1,000
(according to Alcan) or even 800 (according to the Mayor’s educated estimate, based on Alcan’s  40-per-cent owned Alouette smelter in Quebec).

So, why isn’t Alcan taking advantage of Kemano’s  low costs to make more metal? Mr. Wozney suspects it’s because it’s more profitable to sell the  surplus power to B.C. Hydro (that is, B.C.  taxpayers) at market prices.

It gets better. The new smelter will use even less electricity than the 52-year-old one does --  30 MW less by 2009, as much as 120 MW less by  2014. So, Alcan will get lump sum payments from  B.C. Hydro of $45-million (Canadian) in 2007 and
$66-million in 2011, in addition to the market prices the utility will pay over all for electricity purchases from the aluminum company until 2024.

The same scenario risks being played out in Quebec, where more than a third of Alcan’s 3.5 million tonnes in global smelting capacity is located. Here, too, previous governments let Alcan build its own hydro stations on the basis the power would be used to create smelting jobs. Old smelters are being shut down, a couple replaced by more energy-efficient ones. This
means Alcan will likely have megawatts to burn in coming years. The legality of Alcan’s expected move to sell the surplus power at hefty sums on the open market will be a hot topic, as it is in Kitimat.

Or as it could become in Cameroon. Alcan’s 47-per-cent-owned Alucam unit has signed a letter of intent with the government to build a $900-million (U.S.) hydroelectric station and aluminum smelter in the bauxite-rich African nation. More than three-quarters of Cameroon’s 17 million people don’t even have electricity, and those who do pay several times more for it than
Alucam. The surplus power from Alcan’s new hydro station will be sold back to Cameroons, whose per capita income is barely $1,000.

So what business is Alcan in anyway?

kyakabuski@globeandmail.com

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