Alcoa suspends power deal as aluminum drops

There are times when Whatcom County feels like its own little world, sequestered between the Chuckanut Mountains and the border. Our little cove seems to weather the economic storms and what happens here tends to stay here.

But along the shores of Cherry Point, all eyes are looking abroad. For the three large manufacturers located on that small section of coastline — oil refineries BP Cherry Point and ConocoPhillips and aluminum smelter Alcoa Intalco Works — the world market is as much of a concern as the local economy.

And lately the world markets for commodities like oil and aluminum have been declining.

The price of aluminum dropped an astonishing 56 percent in just the last six months, according to Alcoa’s fourth quarter report. Similarly, the price of oil has dropped from its record high of more than $140 a barrel to less than $40.

Hard times have come quickly to these industrial giants, forcing stern contemplation of future plans. For Alcoa, that meant halting its potential 20-year power deal with the Bonneville Power Administration. This deal, which fell through on Jan. 22, would have secured enough electricity to operate half of the aluminum smelter. But the current economy has both sides skittish about the future.

“With the recent changes in the world economy, it has required us to look at what would happen if another one of these slowdowns were to happen in the next 20 years,” said Alcoa plant manager Mike Rousseau. “We decided it would make more sense to back up a little bit and start making a deal that would allow us to survive one of those downturns. We’re committed to signing a long-term contract, it just has to be under the right framework.”

Rousseau did not elaborate whether that means more power or cheaper power for the smelter, but he said a new deal could easily be reached within the year. Nevertheless, the move has racked the nerves of many in the community, including political leaders.

“It is disappointing that BPA and Alcoa have so far been unable to reach a long-term agreement to help keep family-wage jobs at the Ferndale smelter after 2011,” said U.S. Rep. Rick Larsen in a statement. “However, I am encouraged that BPA and Alcoa have agreed to continue working toward a power contract that works for both parties. Although I recognize that the aluminum market has been hit hard by the current recession, it is important that BPA and Alcoa reach an agreement as soon as possible to provide long-term stability for Intalco workers and their families. I urge them to return to the table immediately.”

Alcoa losing 200 workers

Rousseau has already lived through the closure of one aluminum smelter and he isn’t ready to see it happen again. When the plant he worked at in Longview, Wash. closed during the energy crisis in 2000, it put more than 700 employees out of work.

“I was there when we shut down that plant,” he said. “That’s not a fun job. People put their blood, sweat, tears and energy into being successful. And to see a day when you shut one down and to see the impacts it has on people’s lives, it makes you that much more driven to figure out ways to survive during tough economic times.”

And tough times these are indeed. In Alcoa’s fourth quarter report, the company announced that earnings dropped $1.19 billion (down to $5.7 billion) and that it is cutting 15,000 jobs throughout the company, in the United States and abroad.

That means a loss of approximately 80 jobs here in Whatcom County, Rousseau said. Combined with the job cuts announced back in November —when the facility reduced production — Alcoa Intalco Works will have lost 170 full-time employees and 30 contractors.

“It’s an unfortunate step because we’ve got a lot invested in these people,” Rousseau said. “It’s not something that we take lightly because you don’t find someone off the street who knows how to make aluminum. It takes about a year to train people. This is a pretty specific business that we operate and the knowledge base that we give people is unique.”

Alcoa also operates Wenatchee Works, the only other aluminum smelter in the state. That facility is undergoing similar cutbacks aimed at reducing overall costs, Rousseau said.

“They are reducing jobs and cutting costs, delaying and postponing everything they can,” he said. “Given the current supply and demand, there probably isn’t an aluminum plant in the world that isn’t doing the same. We’re in a commodity business and when the price that you can sell that commodity for plummets by half in just a period of six months, you’ve got to figure out how you can ratchet back the costs to produce that commodity. Those with the lowest costs survive.”

Electricity is a major cost for producing aluminum. Thus, when the price of power skyrocketed in 2000, all but two of the smelters in Washington closed. Since then, the local facility has not received the reduced industrial power rate from the BPA. Instead, the BPA has offered Alcoa a financial benefit for buying market-rate power.

But the problem with buying power on the open market is that it can fluctuate significantly.

“With the wild swings it makes it very difficult to run a business,” Rousseau said. “With an aluminum facility, you don’t just turn it on and off on a dime.”

Currently, Alcoa is operating two of its three potlines. Under the proposed power agreement that recently fell through, Alcoa would have received the preferred rate — a set rate for power directly from the BPA — for enough electricity to operate one-and-a-half potlines, starting in October 2011.

If Alcoa were to continue operating a full two potlines at that time, the remaining power would have to be purchased off the open market. The big question, though, is whether the demand for aluminum will require that.

Rousseau is optimistic: “All indications are that there is a bright future for aluminum.”

West Coast refineries fill a need for fuel

While Alcoa renegotiates a power deal to keep its facility running, BP announced late last year that it will pour $1 billion into the Cherry Point refinery for upgrades in the next five years.

But that doesn’t make the present mess any more bearable. Fuel prices, once the bane of every budget, are back down to levels not seen for several years, and overall demand is also shrinking.

That may be a concern for oil industry execs, but here in Whatcom County and all along the West Coast, refineries are still struggling to meet demand. That’s because the West Coast does not have enough refineries to meet to the regional demand, said Frank Holmes, the manager for the Northwest region for the Western States Petroleum Association.

“The West Coast is sometimes referred to as a fuel island,” Holmes said. “We don’t have a lot of interconnected pipelines like other regions. So we pretty much have to provide all the fuel on the West Coast because there are only a couple of pipelines that can bring additional fuel into the region. As a result it’s been short on fuels, particularly in California.”

About 95 percent of the fuel produced at BP Cherry Point, the largest refinery in Washington, stays on the West Coast, said spokesman Michael Abendhoff. The facility ships its fuel down the Olympic Pipeline to Seattle and Portland and also provides a large amount of the jet fuel for SeaTac Airport. The next closest BP refinery is located in Los Angeles.

“We’re doing quite well, even with the dramatic swings in the oil market over the last two years,” Abendhoff said. “Is the drop in oil concerning to the corporation? Sure, overall. But in terms of Cherry Point specifically, our main focus is on our ability to make fuels that the market needs.”

BP threw additional support behind the Cherry Point facility late last year by announcing that it will spend $1 billion in the next five years on system maintenance and upgrades. Compared with other refineries, the Cherry Point refinery is young — a mere 35 years old — and strategically located here on the West Coast, Abendhoff said.

As of press time, ConocoPhillips public affairs director Jeff Callender said he could not comment on the refinery’s status before the company reported its fourth quarter earnings on Jan. 28. But the company is actively looking at ways to reduce costs and has set a goal to reduce energy consumption by 10 percent by 2012, Callender said.

The company also completed several major maintenance projects in 2007 and does not have any more planned for this year.

Meanwhile, many in the industry are expecting the market to turn around soon.

“The supply and demand balance is so tight that prices can’t stay this low long term,” said Abendhoff of BP. “There’s more consumption and more cars out there than ever before.”


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