Alcan to invest US$1.8B in Kitimat

A proposal by Alcan (AL-T, AL-N) to invest US$1.8 billion on a modernization program at its aluminum smelter in Kitimat, B.C., is getting a cool reception from community leaders who believe the company is more interested in lucrative power sales from the Nechako River system than in using that low- cost power to expand aluminum production.

The modernization program would increase production by more than 60% to 400,000 tonnes per year from the current annual rate of 245,000 tonnes, and boost Alcan’s annual global primary aluminum production by more than 4% in the process. But as municipal manager Trafford Hall points out, this production rate is significantly smaller than the 550,000-tonne-per-day expansion the community had hoped would be on the drawing boards after years of cutbacks and job losses.

“We predicted in 2001 that Alcan would offer a significantly scaled-back smelter expansion in exchange for the permanent right to export power, and that’s exactly what we believe happened,” Hall says. “We have the cheapest power in the world, yet even with growing demand for aluminum, Kitimat is the only smelter (in Alcan’s portfolio) not operating at full capacity. Now we’re being offered what we call a ‘half-size smelter,’ relative to what could be built in the region given the competitive advantage of low-cost power.”

Such sentiments represent a public relations meltdown for Alcan, which had enjoyed staunch support from Kitimat since the town was carved from wilderness in the early 1950s to support the hydroelectric project and 286,000-tonne daily capacity aluminum smelter complex. At that time, the project was the largest public undertaking in Canadian history.

As part of the deal, the provincial government allowed Alcan to dam the Nechako River to feed the powerhouse at Kemano, a former outpost on the slopes of the Coast Mountains. The goal was to provide low-cost power to the smelter and to other industries in the province.

Hall insists that civic leaders and most residents continue to support the company’s right to use public waterways to expand its business. So do union leaders, who point to a 20-plus-year public record of urging Alcan to expand its aluminum production.

“This community had great relations with Alcan for more than fifty years,” Hall adds. “That all changed under the new management.”

Alcan has changed as a company since setting foot in the B.C. wilderness more than 50 years ago. The company absorbed Alusuisse Group of Switzerland as a subsidiary in 2000, followed by the 2003 merger of Pechiney SA, based in France. As locals see it, however, the problems began when Alcan began selling power to the U.S. in 2001, particularly to energy-starved California, through BC Hydro subsidiary, Powerex. Reported prices of US$$125 per megawatt hour far surpassed the generation cost of about US$5.

“It was a smart business decision,” Hall quips, “and perfectly in tune with the company’s new motto of ‘maximizing value.'”

Power issue

The power sales became such a bone of contention that the community of Kitimat twice launched (and lost) lawsuits against the company for selling power generated from the river system. Labour leaders and federal and provincial politicians also jumped in the fray, alleging that Alcan’s “shift to power sales” from aluminum production allowed “windfall profiteering” at the expense of jobs and industrial output.

Alcan spokesman Alexander Christen says the company has been “unfortunately and unfairly” characterized by a small minority for the power sales, which were allowed under its original agreement with the provincial government. He added that the new expansion proposal effectively puts an end to such sales and positions the company to increase its economic benefits to the region and provincial economy.

Alcan says the modernized Kitimat smelter is designed to use “virtually all of Alcan’s firm power” from its wholly owned Kemano hydroelectric plant, and will use that power “more efficiently than ever before in the smelter’s history.” The plant will use the latest European smelting technology described as “the most advanced, efficient and environmentally friendly technology available.”

Alcan also signed an agreement-in-principle with BC Hydro that includes a smelter-first provision to ensure that power deliveries to the smelter would take priority over sales to the government-owned utility. Alcan also agreed to sell any surplus power to BC Hydro directly, rather than to Powerex, starting at the end of this year.

“None of this means the sales will end,” Hall says. “It’s the thin edge of a powerful wedge that will allow these sales to continue.”

Alcan says the modernization program will secure 1,000 stable jobs for at least the next 35 years, and roughly double this number during the construction phase. Dispute over power sales aside, this comes as positive news for Kitimat, as more than half the town’s population of 12,000 is directly or indirectly supported by the smelting complex. The first of the new capacity is projected to come on-stream in 2009, with final metal on-line by the end of 2011.

The expansion project is still subject to final board approval and other conditions, including environmental permits and final agreements with BC Hydro and the union representing Alcan workers.