Alcoa plant in Frederick a long shot to stay open

June 15, 2005|By Jay Hancock

CORPORATE executives always blame economics when threatening to close plants, even if the real reason is management incompetence, greed or an attempt to bluff concessions from workers and tax authorities.

But when Alcoa says that the market is "difficult" for its Eastalco aluminum plant in Frederick County and that events outside its control will make the facility unprofitable without assistance from the state, believe it.

Economic factors rarely pose a more potent or obvious threat than they do here.

I've run the numbers and consulted the experts, and the disheartening conclusion is that Eastalco and its 639 jobs (average pay $51,000 plus benefits, says the company) have only the longest of shots at being around next year. Even state officials, whom Eastalco bosses are petitioning, will be hard-pressed to help.

"I don't want to admit defeat until we've tried everything," says Aris Melissaratos, Maryland's economic development czar. But, he adds, "I don't know how we can intercede, frankly."

The problem is electricity.

Little if anything uses juice like aluminum smelting. While iron and copper processors employ furnaces to refine their product, aluminum makers must run a current right through the dissolved alumina ore. Think of it as the baseboard-heater method of metal production.

Electricity accounts for about a fourth of the price of raw aluminum. Eastalco is by far the biggest electricity customer in the state, contributing 13 percent of Potomac Edison's revenue last year and drawing enough megawatts to power 1 in every 10 of Maryland's households.

And the cost of electricity has popped along with that of all other energy. Eastalco's contract with Potomac Edison parent Allegheny Energy, signed years ago when megawatts were cheap, expires Dec. 31. At the renewal rates Allegheny and other suppliers are offering, Eastalco says it would lose money with every ton it ships.

Unfortunately, that's no fabrication. Neither Eastalco nor Allegheny would break down the terms of the present deal, but I calculate the aluminum mill is paying about $28 per megawatt-hour. That's already at the edge of profitability for a North American producer, experts say.

"If they're not going to get power under $25 a megawatt hour, it's going to be hard for them," says Frank McGravie, a Montreal aluminum consultant with Aluminpro.

Well, Eastalco is not going to get power under $25 a megawatt hour after its Allegheny contract expires. It probably won't even get it for under $40. Mid-Atlantic power consultants say the going bulk rate is more than $50 a megawatt hour - even if you lock in the price by buying electricity futures.

Electricity is more expensive because the fuel used to make it - oil, coal and gas - is more expensive. Eastalco has cast its predicament as a "deregulation" issue, as if somehow regulators would have had the power to reverse booming energy demand, tighter supplies and the tenets of economics.

But this is about the cost of industrial inputs, not deregulation. Eastalco, which imports alumina from Suriname through the port of Baltimore, was built more than three decades ago to take advantage of Allegheny Energy's cheap Appalachian coal.

The price of Appalachian coal has doubled in three years. Energy and aluminum can now be made much more cheaply elsewhere - in Iceland, for example, where Alcoa is building a hydroelectric-powered smelter, or Brazil, where it is expanding one.

So what can Eastalco do? What can anybody do? For Eastalco the difference between $28 a megawatt hour and $50 is almost $70 million a year - not the sort of change sitting around in Maryland's Sunny Day economic development fund.

Alcoa executives seem entirely sincere in their efforts to save the plant and the jobs. If they weren't, they could close the place tomorrow, resell the cheap electricity Allegheny owes them through the end of the year and pocket a quick $35 million or so.

But it's not clear what they want from the Public Service Commission, whom they meet Friday, or the Department of Business and Economic Development, with whom they've had continuing discussions.

Are they asking Maryland taxpayers to subsidize Alcoa to the tune of millions? Do they want regulators to force one corporate citizen - Allegheny - to subsidize another - Eastalco - by a similar amount?

Eastalco spokesman Earl Robbins says the company is still considering its options and couldn't be specific. "It's a very tough situation for everybody involved," he said.

The solution is out of sight. But he's not fooling about the problem.

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