Alcoa Inc. (AA:US), the largest U.S. aluminum maker, plans to cut electricity use at three smelters in Quebec starting in November 2014 after objecting to a planned increase in energy prices.
Alcoa notified Hydro-Quebec, which is owned by the Canadian province, that it will reduce consumption in November and December next year, New York-based Alcoa said today in an e-mailed statement. The new price due to take effect starting in 2015 would make the plants uncompetitive, Alcoa said.
“The government of Quebec is in discussions with Alcoa at the highest level,” Quebec Premier Pauline Marois said today in the provincial legislature in Quebec City, in comments broadcast by Canada’s RDI television.
Alcoa has already cut output this year in Quebec as well as the U.S. and Brazil as it tries to reduce costs. The company is evaluating 460,000 metric tons, or about 11 percent, of its annual smelting capacity for curtailment or permanent closing by the end of 2014. The price of aluminum has fallen 8.7 percent this year amid a global oversupply.
Alcoa’s operations in Quebec include the Baie-Comeau, Becancour and Deschambault smelters, which have a combined production capacity of 1.06 million tons, according to a September company filing. That’s equal to 22 percent of companywide capacity. Alcoa closed two production lines at Baie Comeau representing 105,000 tons of capacity in August.
The company’s announcement today signals it may idle more output in Quebec if a new power contract doesn’t have favorable terms, said Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia. Less power use means less metal, he said.
“Power usage and production translate directly,” O’Carroll said in a telephone interview. “You can put in more efficient light bulbs but 99.5 percent of the electricity used in the smelters is used” to make aluminum.
As an alternative to cutbacks, Alcoa could use the threat of withholding future expansion in Canada as leverage for a more favorable contract, he said.
“A competitive power rate is needed that allows Alcoa to continue to invest in its operations and maintain its important economic impact in Quebec,” Alcoa said in the statement. “The rate must be competitive on a global scale and flexible enough to adapt with changing aluminum market conditions.”
Danielle Chabot, a Hydro-Quebec spokeswoman in Montreal, didn’t immediately respond to messages seeking comment.
Hydro-Quebec charges industrial customers that use more than 5,000 kilowatts a price of 3.04 Canadian cents (3 U.S. cents) per kilowatt hour, or what it calls the L rate, according to the utility company’s website.
Alcoa’s current power contract, which is indexed to the price of aluminum, should be extended, said Nicolas Dalmau, a company spokesman. Switching to the L rate would increase Alcoa’s costs by $220 million annually, he said today in an interview on RDI television.
“We are not asking for a lower rate or a drop in the L rate,” he said in the interview. “We think the formula that was set up 25 years ago in Quebec, which is called the risk-sharing formula, is a winning formula and we think it can be modernized.”
Alcoa uses 13 million to 17 kilowatt hours per ton of aluminum produced, according to company filings. Electricity accounts for about 26 percent of its primary aluminum production costs, filings show.
Alcoa fell 0.8 percent to $9.46 at in New York. The shares (AA:US) have increased 9 percent this year.
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