BC Business
In one corner: the town of Kitimat, with suspicions that Alcan wants to halt aluminum production in favour of selling power to BC Hydro. It’s doing everything it can to foil the aluminum giant’s electricity sales.
In the other corner: Terrace, with big plans to create an aluminum-based secondary-manufacturing industry. It wants to keep its largest employer happy and is less than thrilled with its neighbour’s mudslinging. Let’s get ready to rumble In the heart of B.C.’s Kitimat-Stikine district, the two towns of Terrace and Kitimat are having a spat. Both are resource-based towns struggling to prop up their vulnerable economies, and both are hugely dependent on Alcan Inc.’s aluminum smelter in Kitimat for their economic well-being. Each desperately wants to see Alcan follow through on a commitment to invest in a new $1.8-billion smelter upgrade. The question is: how best to persuade Alcan to make good on its plan for the upgrade? That’s where the two cities part company and turn what should be a fairly routine industrial-development story into a soap opera where every character has something to win or lose. Terrace officials firmly believe that Alcan’s upgrade will lead to a new aluminum-based secondary-manufacturing industry in the region. Kitimat is not convinced. For the last few decades, it has been at war with Alcan over the aluminum giant’s commitment – or, in Kitimat’s opinion, its lack of commitment – to make that aluminum smelter grow, keep it economically viable and remain a strong local employer. Resource towns tend to have a love-hate relationship with the one industry that dominates the local economy and employs most of its citizens. They love the jobs and tax revenues; they hate the potential for blackmail when the company wants something. Kitimat is no exception. For more than 50 years, the town’s fortunes have been tied to Alcan’s huge aluminum smelter and the Kemano hydroelectric dam and generating plant that provide the electricity to run it. There are other industries in town, but none has the same impact, or political clout, as Alcan. The issue, as far as Kitimat is concerned, is simple. The city believes that Alcan is far more interested in making lucrative surplus power sales to BC Hydro than it is in using that power to make more aluminum – despite the corporation’s public statements to the contrary and its August announcement that it will indeed spend US$1.8 billion to upgrade the smelter and make more aluminum. Kitimat just doesn’t trust Alcan, and has opposed the Montreal-based giant’s every move. It has gone so far as to file a lawsuit against Alcan that, if successful, would legally bind the company to use its Kemano electricity solely for industrial purposes. Kitimat’s strategy? The city believes such a ruling would leave Alcan no choice but to build an even bigger aluminum smelter. But here’s the conundrum: about 60 kilometres up the road from Kitimat lies Terrace, which is just as dependent on the Alcan operation (Alcan is also Terrace’s largest employer). Terrace strongly disagrees with Kitimat’s in-your-face approach to Alcan and is worried its hardball approach might just scare Alcan away for good. It believes Alcan’s smelter upgrade is the key to the region’s economic revival, when you factor in the new container port at Prince Rupert. Scheduled to open next fall, the port expansion would give secondary aluminum manufacturers easy access to markets in Asia. The thinking is that an expanded aluminum smelter, coupled with Asian access, would attract a bevy of new manufacturers to the region. But that can’t happen if Alcan walks away from its smelter upgrade. Terrace officials are so miffed at the dispute between Kitimat and Alcan that, along with seven other municipalities in the Northwest, it took out a full-page $15,000 ad in the January 25, 2007, Vancouver Sun expressing its support for Alcan and urging everyone to get back to a negotiating table to sort the problem out. The latest twist in the ongoing dispute came at the end of last year. In December, the British Columbia Utilities Commission (BCUC) rejected a contract signed by Alcan to sell surplus power from its Kemano hydroelectric facility to BC Hydro. The contract was brokered by the provincial government. In short, the BCUC thought BC Hydro was paying too much for power it had already conceded it does not need and that, contrary to Victoria’s spin, the contract was not in the public interest. This new surplus-power-sales contract was one of three key requirements Alcan cited as crucial to the completion of the smelter upgrade. While Terrace fumed over the BCUC’s decision, Kitimat rejoiced, having long argued that letting Alcan make piles of money from power sales to BC Hydro would, in fact, discourage the company from making more aluminum in Kitimat. Kitimat officials don’t believe Alcan will complete its smelter upgrade unless it is denied the opportunity to earn extra cash by selling power at market prices to BC Hydro. Kitimat has further pushed its point of view with a court case (a decision was imminent at press time) that argues Alcan is breaking a 50-year-old agreement requiring it to use power from the Kemano hydroelectric facility for aluminum production, not bulk power sales. Terrace officials say Kitimat is playing with fire, threatening a major employer the region needs to keep on side. “We’re surprised, a little bit, at the venom that’s displayed towards Alcan,” says Jack Talstra, Terrace’s mayor since 1985. “With that ad [in the Vancouver Sun], we wanted to get across that there’s more voices than the District of Kitimat. We got support from seven other communities – surprising, since they had to stick their necks out a little.” Talstra insists Kitimat’s determination to block Alcan from profiting big with surplus power sales is wrong-headed – especially given that Alcan has made it clear surplus power sales are a key condition to proceeding with the smelter expansion. “We should stabilize this company into our region for many years to come,” says Talstra, arguing that a new, efficient, high-tech smelter employing 1,000 residents is an improvement over the current outdated smelter with 1,500 employees. “We know [the new smelter] will be around for the next 35 to 50 years,” Talstra says. “We also know it will be a lot less of a polluter than it is right now.” [pagebreak] Alcan’s smelter rebuild would take annual aluminum capacity from 250,000 tonnes to about 400,000 tonnes, and that capacity has not yet been committed to customers (unlike most of Alcan’s current production). Talstra has his eye on a new, secondary aluminum-manufacturing industry, most likely auto parts. What makes it particularly viable is the most dynamic change in the Pacific Northwest since Alcan first arrived on the scene in the 1950s: a new container port down the road in Prince Rupert. The first container ship is scheduled to arrive in the fall, and Terrace wants to capitalize on the industrial development possibilities. “We immediately saw an opportunity there,” says Dave Menzies, Terrace’s economic development officer. “We met with Alcan in my office just to talk about the potential for doing some value-added here. This whole thing came about as a result of discussions we had with Asian entrepreneurs and industrialists who have been touring the Northwest here.” Menzies says Terrace is close to reaching an agreement with First Nations representatives that will open up more than 2,000 hectares of flat industrial lands right next to the airport. It would be easy to build a spur line to the CN Rail line within 50 kilometres of Alcan’s smelter. He says there are advantages to manufacturing aluminum car parts in the area:
“There has to be a business case made,” says Paul Henning, Alcan’s director of operations in B.C. “If it can’t stand on its own two feet, then it doesn’t matter how you get the aluminum feedstock and what the market is. There must be a viability study done on using the advantage of a local smelter, container port, what goods can that business supply. If you don’t do that, all the competitive edges could be lost.” Molten aluminum provides a significant cost advantage to a local manufacturer, Henning says. “If it’s molten, there’s no incremental cost to get it liquid. You still have to keep it warm, but the energy cost is much smaller than starting from scratch.” Kitimat officials are skeptical about Terrace’s dream, despite its sister community’s enthusiasm. “I haven’t studied it sufficiently to tell that an aluminum wheel factory will come here because, frankly, I don’t think the proximity to a smelter is the location trigger,” remarks Kitimat city manager Trafford Hall. “[Containers] are not a huge advantage. Every location in the world has a rail or a road. The higher value added, the less important is the logistical issue of raw material.” There’s also the issue of finding enough workers to support a local aluminum industry. “We have a problem with human resources up here,” Hall continues. “It’s far away, far from hospitals, far from cities. It’s hard to get people here. My kids are being educated somewhere else.” Nevertheless, at least one local Asian businessman is intrigued by the concept. David Fung, CEO of ACDEG International Inc., toured a group of Asian entrepreneurs and potential investors through Terrace and Kitimat last November. “The container terminal has been the driver because of the competitive freight rate going back to Asia,” he notes. “Alcan’s plant in Kitimat is of interest because of the aluminum available, because of the ability to ship manufactured parts to a wide range of ports in Asia at costs that are quite attractive.” Fung won’t discuss details, but confirms that he is working on a joint venture with Asian and North American partners that could involve manufacturing auto parts. A 2004 survey by the Asia Pacific Foundation of Canada estimates that, over the next seven years, Asia will contribute about 57 per cent of the growth in the global auto manufacturing industry and Canada could be the one feeding the machine. “Canadian auto-parts exports to the top three Asian markets – China, Japan and South Korea – have doubled in the past five years,” the survey concludes. According to Fung, development of an aluminum-based auto parts industry in the Kitimat-Terrace area could happen in as little as three to five years. “If we are clever enough as a community, we can learn to manage it and capture it before it goes somewhere else,” he says. “Capital is quite fluid. We have had exploratory discussions with Alcan, but Alcan and Kitimat are in a running battle and that’s not particularly helpful.” And that’s what worries Terrace Mayor Talstra. If Alcan walks, it’s “another downer to our area,” he says. And Terrace has already had more than its share of forestry-related setbacks over the years as uneconomic mills have closed. Dave Menzies, Terrace’s economic development officer, calls the ongoing war between Alcan and Kitimat a “fiasco” that threatens to derail a project that has enough challenges without adding politics to the mix. Menzies had already developed a long list of current aluminum manufacturers to approach and was on the verge of launching his campaign when the BCUC decision was released. The campaign is now on hold. As this magazine went to press, there was still no resolution to the standoff over the power sales agreement. Both Alcan and BC Hydro had reserved their rights to appeal the BCUC decision, and local and provincial politicians continued to urge a re-negotiation that would persuade Alcan to go ahead with the upgrade. A decision on Kitimat’s court case was also still pending It is not clear what will happen if Alcan can’t sell power at a rate it believes it is entitled to. Some believe the threat to withhold the upgrade is a bluff. Others suggest that Alcan could shift gears completely, run the existing smelter into the ground and do a deal to sell the Kemano hydroelectric facility to BC Hydro. In other words: make aluminum somewhere else in the world. Should the worst-case scenario play out, one thing is certain: the small-town feud between Terrace and Kitimat will boil over, and what could have been the best of times will give way, for residents bereft of their largest employer, to the worst of times. n Demand for aluminum grows with green agenda There’s nothing like $50-a-barrel oil and a panic over global warming to whet an automobile manufacturer’s appetite for lightweight aluminum. The lighter a car is, the less gas it burns, and today that’s worth a premium. It’s good news for the world’s aluminum producers, and could further boost Terrace’s push to attract a secondary aluminum manufacturing industry into its fold. The European Aluminium Association (EAA) recently published a study that shows aluminum use in motor vehicles has grown from about 50 kilograms in 1990 to 132 kilograms in 2005. Conducted by European consultants Knibb, Gormezano and Partners, the study looked at 15 million cars produced in Europe and analyzed power train components, suspension components and other body parts. The EAA claims that the increased use of aluminum in automobiles, and the corresponding reduction in weight, will save a billion litres of diesel and gasoline a year and prevent about 40 million tonnes of carbon dioxide emissions over the 200,000-kilometre average life of a car. Aluminum parts are pricier, of course, but as oil continues to climb north of $50 a barrel, the fuel savings from weight reduction will more than make up for the additional capital cost. Alcan Inc.’s B.C. director of operations Paul Henning is well aware of this shift in the automotive sector and the impact it will continue to have on global aluminum demand. “Over the life cycle of the vehicle, we link it clearly to weight saving,” he says. “The new Jaguar XJ6 and XJ8 are all aluminum.” Hardly cars for the masses, but where Jaguars lead, can Toyotas be far behind?