Uncertainties in the World of Aluminum Investments in Mid-2006

Around 2000-05, the world economy began growing faster than at any time since the post WW2 era. This is mainly a consequence of a general progress towards republican institutions (Rule of Law, Individual Rights, Limited Government, Free Trade) which originated in the 80’s. The effect is felt in Latin America (since the 80’s), in ex-Communist countries (Central Europe, and now Russia and CIS countries), in China, in India, and now even in Africa although not in all countries and not without some serious tensions.

Economic growth means growth of energy consumption, which means more generating capacity. Building new power plants means facing political objections, the main ones being concerns about environmental impacts, others being more political objections regarding sustainable growth and even objection to so-called “globalization” of economy.

The business world begins to realize that the general resistance to so-called “globalization”, meaning in the minds of classical economists resistance to wealth creation through optimization of resources and markets according to the eternal dogma of the Market’s “Invisible Hand”, happens not because the world opinion is really turning against Adam Smith’s famous theories, but because so-called “Capitalism” is seen as degenerating into “Stock-Optionism”. Stock-Optionism being the system creating a link between the shutdown of a faraway plant, the anticipated cost reduction supposedly resulting of it, the anticipated increase in profits, and the anticipated increase in stock prices, this in turn benefiting insider trading and stock option holders who can cash in now on these cumulated anticipations. This link has a name: the strategy aiming at stockholders’ value creation as a goal in itself, instead of as a consequence of a successful competitive strategy. Whatever can be your opinion about Stock-Optionism, it triggered a resistance to Globalization which impacted on investments in energy capacity whether new capacity or refurbishing.

Energy prices had to go up first to force public opinions to concentrate on the real issues and approve the following measures:

• The world economy needs to keep growing if underdeveloped countries will achieve a decent living standard; this means more energy generation.

• Growth can be sustained with a more optimal use of energy; various energy savings measures will be encouraged. Energy consumption per capita, today of 20-50 GigaJoules/Year in developing countries, of 150-200 in Europe and of 350 in North America, should progress to around 150GJ throughout the world. Even such modest goals mean a total generation capacity multiplied by about 4 in 2050.

• Thermal and nuclear power plants will supply the bulk of new capacity during the next 30 years;

• CO2 emissions do impact on global warming, and they must be controlled, eventually eliminated; this will trigger higher energy costs. World emissions reached 7.8 Gigatonnes of carbon in 2002. If nothing is done they will reach 12 Gt by 2030 which may not yet provoke major climate changes, but would mean that unavoidable future growth will lead to such a situation. A reasonable plan in the context of the Kyoto Protocol aims at a peak of 11.5 by 2025, then a downtrend leading to a figure of 9 Gt by 2050. Massive reforestation will be pursued, which will both help solve the CO2 problem (trees and some high-fiber plants consume CO2 to generate cellulose through the chlorophyllian conversion), help the pulp & paper industry and reclaim soil in arid lands.

• Natural gas, a noble form of energy that can be and is more and more used as motor fuel as well, generates half less CO2 than coal. It is getting cheaper to ship. It will be favored, but for these very reasons its market prices will increase further.

• The share of electrical energy in total energy consumed by industry and consumers has been growing and will continue to grow, from 18% in 2002 to around 50% in 2050;

• Renewable energies (wind, solar, biomass, photovoltaic, others)will take a bigger share in capacity (perhaps 50% in 2050) but conventional energies will keep growing in capacity in absolute terms if only to reach the above goals. They will all represent high-cost energy, even when subsidized; not suitable for aluminum smelting.

• Consumers and industry must prepare for generally higher energy prices.

On top of that, political considerations impact on energy markets: The Middle-East is part of the Arab World, considered more and more as hostile to the United States, to other “Anglo-Saxon” countries and to many European countries. It also controls some 40% of world oil production, which in theory constitutes a political risk. War situations in the Middle East have, since 1948 onwards, put growing pressure on oil availability and prices. There is a stronger incentive for the US, and also for Japan and Europe, to encourage self sufficiency in energy generation.

Aluminum producers must adapt therefore, not only to a general increase of energy prices and to a gradual vanishing of “Power Islands” offering excess energy at discounted prices, but also to a higher differential between long term energy costs and energy prices.

However since aluminum prices and demand are increasing, all this should constitute a generally favorable context for aluminum investment. And it is. Yet, one can wonder why so many large greenfields keep being delayed. One can also wonder why supposedly obsolete Soderbergs are now revamped and extended, when everyone knows that they pollute more and they are less efficient; and why many older, smaller prebakes do the same.

Reasons are:

a) The bigger the greenfield, the bigger is the 10-year energy contract to negotiate. Energy suppliers do not have excess capacity anymore. They prefer smaller contracts, easier to handle in case of big shifts in demand.

b) The bigger the greenfield, the more it will be dependent on export sales to faraway destinations of ingots, billets or sows. Also bigger will be the energy lost in casting, then shipping and remelting the metal. That factor was negligible when energy costs were low. Now it is not.

c) The bigger the greenfield, the higher is the risk of capital cost over run.

d) Capital costs per tpy in a revamping or extension are roughly half the ones in any greenfield.

e) There are more and more opportunities for an older, smaller smelter, to invest in the casthouse to move into high added value semi-products for a local market.

f) Shifting to Lithium Bath, thus increasing conductivity and reducing temperature, means often the fastest way to increase the bottom line for a minimal investment.