Aluminum prices sharply up
CHARLESTON, W.Va. -- As the Public Service Commission weighs Century Aluminum's request for a special power rate tied to the price of aluminum, global prices have turned sharply higher.
Aluminum prices have surged nearly $400 per ton in recent weeks as European and U.S. central banks have announced plans to stimulate their economies.
The most recent was the U.S. Federal Reserve's open-ended commitment announced last week to buy at least $45 billion in mortgage bonds and another $40 billion in long-term U.S. Treasury bonds each month for the foreseeable future.
Economists believe the central bank moves will either stimulate economic activity or boost inflation, both of which mean higher prices for commodities.
Futures prices on the London Metal Exchange have risen by more than 22 percent since falling below $1,800 per ton in early August. After the Fed announcement last week, aluminum prices shot up by more than $100 to close at $2,177 per ton on Friday.
The price surge is occurring as the PSC weighs Century's request for a power rate structure that would change as aluminum prices fluctuated. When prices were low, the company would pay a lower rate; when prices were high, it would pay a higher one.
Century officials have said they need a new power rate structure to restart their Ravenswood aluminum smelter. That plant closed in February 2009, after the global recession caused aluminum prices to plummet. More than 650 workers lost their job in the shutdown.
The company's power rate request has been complicated by a drop in aluminum prices this year. After they announced in February they hoped to restart the Ravenswood plant later in the year, prices started falling.
Part of Century's proposal involved shifting power costs to other ratepayers when aluminum prices were low. Critics feared the aluminum prices would remain low, meaning customers would get saddled with hundreds of millions of dollars in costs.
Century countered by saying expert are predicting aluminum prices will rise over the next decade. The company says if forecasts hold true, the company would pay higher rates and other ratepayers would come out ahead.
Century spokeswoman Lindsey Berryhill said the recent spike in aluminum prices is just the most recent swing in a historically volatile market.
"We believe that the recent increase in the global price for aluminum is exactly why Century needs the requested 10-year special rate," Berryhill said. "Ups and downs in the aluminum market are not uncommon."
The company hopes the rate will be able to smooth out its long-term power costs, which make up about 40 percent of the cost of producing aluminum.
Century officials believe the recent price bounce is the first sign aluminum prices are returning to their historic norm.
"This recent upward trend is consistent with the view presented by the industry expert who testified in our rate case that aluminum prices fluctuate significantly in the short term, but are forecasted to show steady increases in the long term," Berryhill said.
PSC spokeswoman Susan Small said commissioners are aware of the recent changes in aluminum prices. Small could not say how that would factor into the deliberations in the case.
The PSC has been given three proposals to consider.
The first is Century's plan; the second is an alternative proposal the commission asked power company attorney Steve Ferguson to write; and the third is a proposal written by the Consumer Advocate Division.
Century's plan lasts for 10 years and has three basic elements.
The first uses $20 million in annual tax credits approved by the Legislature earlier this year.
The second would have ratepayers continuing to absorb $17.3 million per year of power company fixed costs that were passed on to them when the plant closed. Appalachian Power shareholders also would contribute about $2.7 million in discounts.
The third part is the most controversial. It involves shifting some of Century's power costs to other ratepayers when aluminum prices fell below the mid $2,300 level.
The second plan, drawn up by Ferguson, would cap the amount of Century power costs shifted to other customers at $60 million over the first three years of the rate plan.
The Consumer Advocate Division's proposal essentially eliminates the third element from Century's plan, capping Century's discounts at $40 million per year over the 10-year period.
The West Virginia Energy Users Group and Appalachian Power noted in their filings they would support the Consumer Advocate Division's plan.
Century said the power costs in both alternate plans are still too high to allow the company to profitably operate the plant.
The commission is expected to issue a decision by the end of September.
Contact writer Jared Hunt at firstname.lastname@example.org or 304-348-5148.