Ahead of the deadline of March 31, Alcoa (
) has announced that it will go ahead with its modernization plan
for the Massena operations. The company has committed itself to
investing $42 million for the next phase of modernization and
another $10 million for economic development in the North Country.
This clears the way for the company to receive low-cost power
from the New York Power Authority (NYPA) for 30 years beyond
2013, provided it spends at least $600 million overall on
Given that electricity costs can account for up to 25% of total
costs in the aluminum smelting process, we think that Alcoa has
taken the right decision from a long-term perspective. An Alcoa
executive also acknowledged that modernization of the plant will
help the company in moving further down the aluminum cost
The funds allocated for the modernization will be used for site
work and support projects in preparation for the construction of a
new potline at the location's Massena East plant. The plan now
needs approval from the U.S. Environmental Protection Agency (EPA),
which has put forth a remediation plan for cleanup of the Grasse
River that makes Alcoa liable for paying the cost. The EPA's
decision is expected next month.
See Full Analysis for Alcoa Here
What Does The Massena Plant Produce?
Alcoa's Massena facility is the longest continually operating
aluminum facility in the world. The company operates two
facilities here - an integrated aluminum smelting/ fabricating
plant and a smelting/casthouse facility. It began operations here
in 1902 to take advantage of the abundant hydroelectric supply in
Massena is home to two aluminum smelters, the East plant and the
West plant. The West plant produces 130,000 metric tonnes of molten
aluminum everyday while the East plant produces 125,000 metric
tonnes. The aluminum produced is then processed by the downstream
business segments of the company to make ingots, rods, bars and
screws. These are then supplied to customers in the
construction, electronics, packaging and transportation
What Does The Modernization Plan Involve?
The modernization project includes the construction of a new
potline at the Massena East plant which will produce 144,000 metric
tons of aluminum per year, upgrades to existing facilities at
Massena West, and modifications to other existing facilities that
will help integrate the two plants and support the new potline.
In addition to building a new potroom at the East Plant,
Alcoa will replace the current "Soderberg" technology at that
facility with the more modern "pre-bake" technology which is
already in use at the West Plant. "Pots" are steel-lined containers
in which molten aluminum is smelted. They are arranged in long rows
in large buildings called potrooms.
Once Alcoa starts using the pre-bake technology at the East
plant, there will be significant improvements in air quality
and emissions and a reduction in the quantity of waste generated in
the aluminum-making process by up to 56%. It will also reduce the
amount of dust generated, thus creating better working conditions
What Took Alcoa So Long To Decide?
According to an agreement between Alcoa and NYPA, the company
had to submit its proposal by March 31 in order to receive 239
megawatts of additional power for restarting its Massena East
plant. The supply of cheap power makes manufacturing in Massena an
attractive proposition for Alcoa. Also, the agreement signed with
the NYPA in 2008 for supply of low-cost power would have been up
for review if Alcoa hadn't submitted its modernization proposal by
March 31. Given these factors and the expected benefits from
modernization, one would have expected Alcoa to have decided in
favor of the plan much earlier.
For all the expected benefits from modernization, Alcoa was in a
dilemma because it faces extra environmental costs beyond the $600
million for the project.
Alcoa has been conducting investigations and studies of the
Grasse River, adjacent to Alcoa's Massena plant site, under a 1989
order from the U.S. Environmental Protection Agency (EPA) issued
under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA). This act deals with the usage,
disposal, storage or treatment of hazardous substances at a number
of sites in the U.S. Sediments and fish in the Grasse river
contain varying levels of polychlorinated biphenyls (PCBs) due to
Alcoa's operations, and the EPA wants the company to bear the cost
of cleaning up.
In choosing to modernize, Alcoa will also have to undertake the
Grasse River remediation project, the scope of which will be chosen
by the U.S. EPA. The proposed remediation project comes with an
estimated price tag of $245 million, which would have to be borne
entirely by Alcoa. Other proposed options for the cleanup range
from a 3-year, a $114 million option, to an 18-year, a $1.3 billion
option, according to the EPA.
Although the combined smelting capacity of the two plants at
Massena represents a relatively small portion of its worldwide
smelting capacity of 4.2 million tonnes, it is a significant part
of its total smelting capacity of 639 million tonnes in the U.S.
Also, it is a low-cost operation due to availability of cheap power
which gives the company a competitive advantage and generates
higher profit margins. Thus, even with environmental costs,
modernization should turn out to be a net positive development for
We have a
Trefis price estimate for Alcoa of $8.
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