Aluminum is made with excess energy, not with energy. This is why the Investment Decision Cycle is slow and uncertain.

The only industry I know living within the same paradigm is the Cheese Industry: You can say that cheese is made with excess milk, not with milk.

I have been trying to forecast investments in primary aluminum smelting since the mid-eighties. It is very frustrating. If you have been reading The ENAL Newsletter for a sufficient time, you can understand why. Names such as Coega, Aldoga, Atlantsal, Alcoven, Bintulu, Friguia, and Trinidad evoke many greenfield projects which have been coming and going in various press releases, sometimes for decades, and nothing to show yet.

A primary aluminum smelter of course is a huge investment. Such investments take careful planning, require Bankable Feasibility and Environment Impact studies, and raise all kinds of political and macro-economic objections, which all takes time. But that doesn’t make it unpredictable.

On top of that, its payback is far in the future. Consider that it is planned to last 30 years, will be charged heavy depreciation costs for ten years, will be profitable the following ten years, and will constitute a fantastic cash cow afterwards if nothing changes in its economic and political environment. And meanwhile, there will be many ways to extent its life span: revamping, extensions, casthouse investments to move downstream in Value Added Products, etc. Therefore uncertainties that can affect the date of payback weigh a lot within reasons to delay any project.

Then there is the effect of competing, alternative investments. A rule of thumb says that the extension of an existing smelter costs, per tpy, half what costs a greenfield. So, many greenfields are delayed in favor of more favorable extensions. This is why we still have only two huge smelters in the Middle East, which keep adding capacity.

But there is much more than that.

A huge cause of uncertainty in giving birth to a greenfield is that primary aluminum corporations - even the major ones - are not familiar with the intricacies of the energy market.

This market is dominated by utilities, often state-owned or state-regulated, pursuing goals which aren't only for profit but take into account political and macro-economic conditions as well. These political conditions are influenced by prejudices and misperceptions of the Media, the politicians, and public opinion. And, for an energy supplier, an aluminum smelter represents a near impossible decision: how can it commit such a huge amount of power (typically 1,000 to 1,500 MW, on a 24/7 basis, the equivalent of a full-sized power plant) for such a long time (contracts are flexible, but a greenfield needs predictable and favorable energy rates for at least ten years), when the local economy needs and will continue to need energy in so many other sectors, and always at higher rates?

Things are different in a country with huge energy reserves and little population like Mozambique, Iceland or Bahrain, or like Quebec and Venezuela in the 70's. When any country wants to develop such reserves, the utility loves the aluminum smelter, which represents an immediate captive market requesting a constant power load. But not forever; and, besides, there are less and less such countries.

This is why, to improve our forecasts, we look at the energy market in the country where the smelter is envisioned. (After all, we call our Newsletter the ENergy and ALuminum Newsletter!) Here is what we have learned:

Any decision to invest in smelting capacity is conditioned solely by the energy factor, as long as the project is on the sea. With access to the sea, the project sill procure alumina and carbon products at world prices, taxed with a very modest shipping cost. When it's worth around $300-400/tonne, any commodity is cheap enough to ship by sea. Labor cost is not a factor: it is marginal compared to total costs. Therefore the most complex viability studies and the most difficult negotiations will be the ones addressing the energy angle.

It is extremely difficult to find a utility interested in a long-term commitment, say 10 years, for a fixed load power supply in the range of 15-20 mills ($15-20/MegaWatt-hour). It's difficult even with the promise of a flexible rate, for instance indexed on the LME price (which used to be popular). Energy markets are simply too attractive (high prices, demand growth…) and will remain so in the foreseeable future. You only find a utility willing to commit to such a contract in the situation of huge excess energy. A good recent example is Mozambique.

If the utility faces such a situation, most often it means that some political will has decided on a long-term capacity investment, planning for demand to be boosted that way and for industrial development to follow.

Difficulties are even worse when the world economy is doing well, as is the case now: good economies boost short-term energy demand. The good times for excess energy are the major economic crises and reconstruction eras, which trigger mega-projects to prime the economy. (Remember 1929-32 in the US, the Tennessee Valley Authority, Bonneville Power and the Boulder Dam? Or 1945-60 in France: Genissiat, Roseland, Donzere-Mondragon and the birth of the nuclear program?)

Now, one difficult aspect in energy generation is environment. Not that the industry is polluting anymore, but it is perceived as such, and as ugly in the landscape on top of that. Therefore decisions either to invest in new capacity or to allocate resources to dedicated industries (such as primary aluminum) combine conflicts of interest in both economy and ecology contexts.

Therefore any smelter project you are reading about now, such as those projects which seems eternally delayed (Coega, Aldoga, Trinidad…), is in fact waiting for a local commitment regarding a long-term, unappetizing energy contract. And the Alcoa’s and Alcan’s are permanently conducting several negotiations of the kind: “If you don’t like me anymore in Quebec, I’ll go to Trinidad. Since you don’t like me enough in Trinidad, I am first going to Iceland. If you are not nice with me in South Africa, I’ll go to Oman.” Etc.

At the end of the cycle, when the moment comes to shut down the smelter completing its obsolescence cycle, the story is the same. The local government wants to keep the smelter alive because by now it represents lots of jobs. So sweeteners are granted to delay the shutdown. The incentives may then trigger other investments, short-term this time, to make the best out of the few years left, or perhaps for a conversion. Kitimat, Alcan’s Soderberg in British Columbia, is investing… Hirakud is using Chinese help to convert an antique HS Soderberg to low-Amp prebake. Etc.

Is this a healthy situation? Not at all! We’ll review that some other time. But meanwhile, that’s the way the cookie crumbles, and you have to cope with it. Let’s see how.

Your goal, in analyzing your market, is to always minimize your sales cost. Visiting a smelter for a sales presentation is costly.

You should list, out of ENAL's CIF Model, the smelters who will plan investments in which your products fit. These fall in several classes:

Greenfields: remember that, if you are a new or little-known supplier, you must focus on the greenfields with whom you have credible references. Of course the best references most are in a smelter owned by the greenfield’s main investor, or in a smelter using the same smelting technology as will be used in the greenfield. You should open talks with the Heads of Engineering of the main investor, so that you are already on the list of known suppliers when their EPCM will be appointed and will start working on a short list of suppliers.

Extensions: The same applies, but you are in competition with existing suppliers who already supplied the existing plant. You must use your references to emphasize what you offer that they don’t. Remember, when in direct competition, the 8 basic questions we discussed in our previous article:

Can you sell them something that would:

1. Increase yield on energy, in other words Faraday?
2. Eliminate troublesome incidents that interfere with potline operations and directly affect production?
3. Reduce raw materials cost?
4. Reduce costs of energy other than electrical, notably fuels, compressed air?
5. Reduce polluting effects?
6. Recover metal or raw material from waste, rejects?
7. Allow the smelter to enter into Value Added Semi-Products?
8. Save on spare parts consumption and cost?

Revampings: For a new supplier, these are the most interesting because you can actually be the one who suggests it when you have a clear cut advantage which would allow a quick payback. So the same 8 basic questions apply, plus sometimes a 9^th one: Can you help reduce labor costs? They are a small factor in most smelters, except antiquated ones where labor costs used to be low but are increasing. Also many revampings take place in an older smelter which is delaying a shutdown and looking for quick-fix solutions. If you can fix it and have good references, chances are the decision will be quick and the results as well.

Use the CIF Model to pinpoint all smelters and projects falling in these categories within the next five years, plus older smelters more or less threatened by energy costs but not to the point of contemplating a shutdown. To find them, read their story in recent years using ENAL Archives which go back to 1998, notably looking for information on date of expiration of their energy contract and on nature of related negotiations. And use our Contact Information service to get the list of decision-makers.

Then, you can engage discussion with the smelter’s management, introduce yourself, what you offer and your key references by email and phone. The feedback will tell you when the right moment to pay a visit is.

Then, it’s all up to you… unless you want to retain me to facilitate the process and the first sales efforts.

Good luck!

Dr. André Teissier-duCros