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Table 6. Derivation of Production Costs of Primary Aluminum According to "Add Factors, Scenario Two" for USA, OECD-Europe, and Japan

($1994 and Year)

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Japan

1287

1356 382

382

Cast House

41 Adder

0
Miscellancous Freight Adder 0
Other Components Subtotal 306.6

Total $1372
Electric Power

1217.6
Alumina (Sec Text)

382 Adder

0 Anodes

141 Adder

0 Cast House (Over US)

60 Adder

0 Miscellaneous Freight Adder 24 Other components Sublotal 285

Total $2086

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Rationalization for a considerable proportion of the production in most countries of all regions derives from the fact that most aluminum companies are vertically integrated and can add value to much of their primary aluminum. One country, Norway, now in a state of transition is developing downstream processing. Norway produces 16% of OECD-Europe's Al.

The situation in Japan is unrealistic. The only planı, Kambara (Shizuoka) is operating 20Kt of 45Kt. Economic viability may derive from subsidized power or specialization in high value added products. The Japanese supply of primary aluminum is drawn from its partial ownership-joint venture operations in regions outside of this study(Australia, Indonesia, South America, for instance).

Comparative prices according to Scenario 2 are shown in Table 6. Here the increase from 2000 to 2010 for USA is 15%; for OECD-Europe, 9.3%; with an initial disadvantage with respect to the USA of 20%.

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and reveal a slight, 4 to 7% unfavorable shift for the OECD versus USA. Again, there are not enough economic penaldies under these scenarios to justify curailment of the production of aluminum by a combination of the prevailing Bayer and Hall-Heroult processes until 2010 in the USA and 2005 in OECD-Europe.

Adding the $350for amortization triggers this consequence when total costs exceed the 1994$LME at $1650:50. In the USA older, non-modernized Soderberg plants such as The Dalles, Goldendale, Columbia Falls, Longview, Tacoma and even prebaked plants such as those at Vancouver, Ravenswood or Hawesville could be impacted. Thus, in the period 2008-2010. Closure of these plants would represent a loss of 1166Ki Al production (29%) and 7070 direct jobs.

In OECD-Europe presently marginally profitable capacity such as that at Hamburg, Voerde, Lannemazin, Fusina, Vlissingen, Karmoy (VSS only) Lynemouth would also be threatened in 20052010. Shutdown of these plants, 787Kt capacity, (9.3% of total) would lead to a loss of 4500 directly involved jobs. Canada and Norway are unlikely to be affected according to this revision of adders because of their lower hydroelectric power rates.

Japan is not discussed because the primary capacity there is insignificant (45Kt) and has to be considered non-competitive.

It should be noted that the prescribed price of electric power for OECD-Europe at ($0.075x.46) 3.45 US¢/kwh is probably unrealistic for the industry weighted average in that region which, in this

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context, includes Canada. In Canada and Norway the cost to the Al industry is close to 1.5/kwh, so with 40% of the capacity in these two countries, the remainder would have to be approximately 4.8¢/kwh which is enough to make the rest of the smelters in Europe non-competitive now.

4. Employment

Using the figures for t Al/

man year stated in Section 1 of this report, the employment in USA primary production is 22,960 (+ 10%). Provided the LME price holds near the prevailing $1640/ Al and no plant is shut down for environmental reasons, employment should not decrease under Scenarios 1 and 2 until 2005-2010. (Internal modemizations may initiate manpower reductions for the same or slightly increased nameplate capacity). Extrapolating the experience of the past decade, it is unlikely that there will be another greenfield reduction plant in the USA (but see Section 8, Reclamation of Aluminum).

The comparable figures for Canada + OECD-Europe are 10,430 + 20,600, respectively, or 31.030 (+ 10%) total jobs in the production of primary Al.

5. Pricing of Aluminum According to Non-Prorated Adders on Electrical Energy.

In this section, the full effect of the electric power price adder is derived; i.e., to the base prescribed for the year 2000; $(.46x.047), US 2.162¢/kwh, the full increments prescribed under Scenarios One and Two have been included in deriving the operating costs for primary Al in the three regions. Factors dependent upon natural gas or distillate do not change.

The significantly increased costs (because electrical energy represents 25-35% of the cost of primary aluminum) are listed in Tables 5 & 7 for Scenarios one and two. Under Scenario One, the operational costs of It Al in the US would increase by $238 (21%) in 2005 and $473 (41%) (1994) in 2010 from $1142 in 2000. Adding the $3504 for amortization, etc., necessary for full accounting, and no increase in the LME bid for Al ingot because of assumed availability from developing countries not affected by emissions mitigation policies, then virtually all of the 4000 KUAl capacity as the USA would be non-viable by 2010. Since the implication that the surcharge would be uniformly applied to hydro as well as fossil or nuclear power, I know of no power contracts that would lead to primary aluminum produced at $200/ton under US typical extrapolated to the year 2010. This would be equivalent to 5.11 DCkwh/b Al which is not technically possible. Therefore, with orderly closure of the plants, by 2015 there would be a loss of 23,000 direct jobs and the loss in GDP would be $6.6 billion/year plus all the supportive cash flows that sustained the products and services consumed by the primary aluminum industry and its employees.

A comparison of the ratios of these derivations of costs of primary aluminum in the three regions listed in Tables 5 and 7 with USA 2000 as a basis can be summarized accordingly;

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With an assumed threshold of 105% of the LME price for Al ingot, less $350/tAl for amortization, a smelter with production costs above $ 1385 becomes potentially non-viable (unless there ensues much "value added" to downstream products). In Europe, practically all capacity except Norway, Sweden, Iceland and Dunkirk might shut down in the period 2000-2015.

Thus under Scenario Two, the smelting capacities identified under Scenario Onc, Section 5 would be likely shut down in both the USA and Europe during the period 2005 to 2010, when the cost of electrical energy represents 40-45% of operational costs. If the 2010 adder, for OECD-Europe (including Canada) of 1.13€/kwh were applied to the prevailing rates to the primary aluminum industry in Canada (1 to 1.5&kwh) practically all that capacity would remain marginally economically viable.

Of course all these comments are predicated upon the developing countries nos being subject to greenhouse gas limitations affecting the price of any source of energy/fuel.

The impact of the prospective shutdown of the combined capacity in (USA plus OECD-Europe) by 2015 (4000 + 4200 Kt) would lead to loss of about 40,000 direct jobs. Assuming the well developed, quite sophisticated plants in both regions which are now comparably competitive and not yet part of the infrastructure in most developing countries that produce primary Al, then those tonnages of ingot would likely be imported (if available) at costs of at least $6.6 billion and $6.9 billion to the two regions respectively.

This leads to the question "Where would this primary Al or equivalent come from?"

It takes about 3 to 4 years to finance, build and commission a modern smelter. At this time "announcements" totalling 8,200 KUAI have not been made which would require availability of 8000 megawatts of electric power.

Thus, the "adders" proposed for electric power in Scenarios One and Two would effectively shutdown all primary aluminum production in the USA by 2015 and an estimated 55% of the existing capacity in OECD-Europe.

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Table 7.

Derivation of Production Costs of Primary Aluminum According to "Add
Factors, Scenario Two" for USA, OECD-Europe, and Japan

($1994 and Year - Adder Not Prorated for Industry)

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