Wenatchee waits and wonders about aluminum smelter’s future

To the outsider, these might look like hopeful times for Kelley Woodard, president of the Wenatchee Aluminum Trades Council.

Twenty months after aluminum maker Alcoa idled its giant smelter just south of town and laid off 428 of Woodard’s union members, the aluminum business is showing signs of life.

Prices for the smelter’s 1,500-pound aluminum “ingots” are recovering. Aluminum companies are reporting modest profits and restoring some idled facilities. Last month, Alcoa announced plans to restart a smelter in Indiana, and, says a spokesman, it continues to “regularly evaluate all of the curtailed sites, including Wenatchee.”

And if market conditions don’t yet warrant restarting the Wenatchee smelter, industry analysts say that could soon change, thanks to President Donald Trump.

In recent months, the Trump administration has taken steps to curb exports of ultracheap, government-subsidized Chinese aluminum that have flooded markets and depressed prices.

Though no fan of Trump, Woodard, 58, readily acknowledges the president’s tough stance on Chinese aluminum “could be a huge plus for us.”

And yet, standing in front of the nearly empty smelter, where Woodard leads a skeleton maintenance crew, this veteran “Alcoan” is surprisingly ambivalent about a restart. That’s a fairly common attitude around Wenatchee.

Without a doubt, the largely agricultural community would welcome a return of the smelter’s high wages, which can top $100,000 a year and pump more than $60 million into the local economy, according to Eastern Washington University’s Institute for Public Policy & Economic Analysis.

Yet people here have learned that, in the fast-changing global metals market, Alcoa’s contributions can no longer be counted on.

This isn’t Wenatchee’s first shutdown. In 2001, after nearly a half-century of continuous operation, the smelter was put in standby mode, or “curtailed”, when the industry was hit by low aluminum prices and soaring energy costs. Alcoa restarted the smelter in 2004, only to shut down 11 years later when prices again fell.

As a result, even among the many former employees hoping to get their old jobs back, there is deep wariness about aluminum. For all the promise of a restart, said Steve King, director of community and economic development in Wenatchee, many former Alcoans are asking themselves, “Do I really want to go through this emotional turmoil again when the next curtailment happens?”

Wenatchee is hardly the first town to find itself at the mercy of this increasingly global and volatile industry. Of the 23 smelters running in the United States in 1993, only six remain operational.

This decline has been especially dramatic in the Pacific Northwest, where 10 communities once boasted smelters and more than 11,000 workers produced 40 percent of the nation’s aluminum.

Today, just two — Wenatchee and Ferndale — have functional smelters, and only Ferndale’s is actually running.

Goldendale, Tacoma, Vancouver, Spokane, Longview, as well as Troutdale and The Dalles, Ore., and Columbia Falls, Montana, are officially “former” aluminum towns.

The current fashion is to blame aluminum’s woes on foreign competition — and not without reason. In China especially, aluminum firms receive huge government subsidies for electricity and financing, which lets them produce, and export, aluminum at far below its actual cost.

Because these subsidies violate World Trade Organization rules, said industry analyst Lloyd O’Carroll, the Trump administration is widely expected to prevail if it formally opens a WTO case against China. And although such cases can take years, China has already begun voluntarily closing many smelters to reduce air pollution and other problems — near-term actions that could reduce global output by more than 3.2 million tons, the equivalent of 17 Wenatchee-size smelters.

Yet one of the biggest obstacles to a restart of the Wenatchee smelter isn’t foreign subsidies, but, ironically, the lingering effects of the government support that the region’s aluminum makers enjoyed for decades.

Major energy user

Making aluminum requires staggering amounts of energy. In the smelting process, the raw material, alumina, is poured into large pots, bathed in caustic chemicals and fried with heavy electric current. The result is a liquefied metal that can be molded into huge ingots, which are then processed into finished products, often at other facilities.

Electricity accounts for about a third of production costs, which is why smelters are usually found in regions with surplus energy. In the United States, that has mainly been Appalachia, with its vast coal deposits, and the Pacific Northwest, where the Bonneville Power Administration and dozens of public-utility districts generated vast surpluses of hydropower.

Wenatchee is a perfect example. The Chelan County Public Utility District’s two huge Columbia River hydroelectric dams — at Rocky Reach and Rock Island, have a combined average output of around 1,100 megawatts, which even now is roughly six times what a community this size normally uses. Today, the Chelan PUD sells much of its surplus outside the area — on wholesale markets, or to other large customers, such as Puget Sound Energy. But early on, Alcoa was PUD’s anchor customer.

For decades, the region’s utilities and aluminum makers operated in rough symbiosis. The 10 smelters consumed much of the power surplus, which allowed utilities to expand their services for other customers. In return, the smelters got power for close to what it cost to produce, a rate far below what was available anywhere else in the country.

Even when Northwest power rates soared in the 1980s and 1990s, thanks to Washington state’s disastrous foray into nuclear power, many smelters got preferential rates from local utility districts eager to preserve those high-wage factory jobs.

Again, consider Wenatchee. For decades, Alcoa’s long-term power contract with Chelan County PUD entitled the aluminum company to 197 megawatts, or enough for 60 percent of the smelter’s needs, at $10 to $12.50 per megawatt-hour. That’s around a quarter of what the biggest industrial users in Washington were paying, and an eighth of the national average, according to U.S. Department of Energy data.

In other words, Northwest smelters enjoyed what was essentially government-subsidized power — and the benefits were enormous. Even when aluminum prices were low, Pacific Northwest smelters could outcompete those outside the region.

Woodard, who started at the Wenatchee smelter in the early 1980s, recalls Alcoa presentations showing the Wenatchee smelter as the most profitable in the company. And much of that, he said, was “because of the power contract.”

But there were downsides, too, as Northwest smelter towns learned when the cheap power went away in 2000.

That year, a poor snowpack cut hydropower output, which forced smelters to buy more of their power from other sources, including the newly deregulated wholesale market. At the same time, unscrupulous traders at Enron exploited the shortage and pushed wholesale power prices above $100 a megawatt-hour — just as a recession and oversupply from new foreign smelters were slashing ingot prices. Soon all 10 Pacific Northwest smelters were curtailed and some 11,000 workers laid off.

If that weren’t enough some smelters began to lose the favorable PUD rates. In Wenatchee, Chelan County PUD faced both rising maintenance costs and criticism that smaller customers were paying more to preserve Alcoa’s discount. Under a new contract starting in 2012, the PUD effectively doubled Alcoa’s power rate.

Even that rate was well under market prices: according to the PUD, over the 17-year contract, Alcoa would realize an effective savings of more than a billion dollars.

But the PUD increase came just as regional smelters were coping with yet another hangover from cheap power: inefficiency.

The low rates had enabled Northwest smelters to profitably run for decades using older technology. By contrast, many smelters elsewhere were “upgrading their equipment to be more efficient,” said Massoud Jourabchi, manager of economic analysis with the Northwest Power and Conservation Council.

In Wenatchee, for example, although Alcoa upgraded portions of the smelter — not least its pollution controls — its basic technology saw comparatively few improvements.

“The majority of our pots were pots that were there when the plant opened more than 50 years ago,” said Jason Roach, who worked at the plant from 1999 until its second curtailment in 2016.

As a result, many Northwest smelters require significantly more labor and electricity than do more modern facilities to make a ton of aluminum, said O’Carroll, the market analyst.

These disadvantages help explain why many Northwest smelters never reopened after 2001: They could not keep up with newer, higher-tech smelters.

But it also helps explain why even surviving smelters, like Wenatchee’s, face a precarious future. Simply put, a less efficient smelter needs a higher aluminum price to operate.

Alcoa won’t disclose Wenatchee’s “break-even” price — and insists that price is only one of many factors driving a restart decision. But O’Carroll estimates Wenatchee’s break-even at nearly $2,000, compared with $1,500 to $1,700 for a more modern plant. Even Alcoa’s Intalco smelter in Ferndale has newer, more efficient technology, said O’Carroll, and a lower break-even price.

As a consequence, the Wenatchee smelter will likely be treated as an auxiliary producer — run only when aluminum prices are high, and curtailed whenever prices fall.

Of course, that would change if Alcoa upgraded the plant’s technologies, or expanded the smelter to allow it to produce higher value finished items. But the huge cost of such an undertakings — O’Carroll said a technology upgrade alone would easily top $100 million — makes it all but inconceivable today.

Rising costs

In a business increasingly characterized by oversupply and narrowing profits, aluminum companies are reluctant to spend heavily on smelting in the United States, where rising costs for energy, labor and environmental regulation have further eroded profits.

When Alcoa and other firms do invest in smelting, said O’Carroll, it’s increasingly to build a new facility in some lower-cost location — such as Iceland, with its abundant geothermal power, or the Middle East, where the natural gas used to generate electricity is essentially free. There hasn’t been a smelter built in the U.S. since 1980.

“They don’t necessarily have to produce aluminum in the United States, particularly if it’s not economic,” O’Carroll said.

And in the future, said Jourabchi, of the Northwest Power and Conservation Council, manufacturers of aluminum parts may simply buy bulk metal from lower-cost foreign smelters and abandon U.S.-based smelting altogether. In that context, it’s notable that Alcoa recently split into two separate entities: Arconic, which makes finished products, and a downsized Alcoa, which manages the aging U.S. smelter fleet.

That reality isn’t lost on Wenatchee residents. “If there was interest from Alcoa to come in and reinvest [in the smelter] then I think the community would be all over it,” said King, head of economic and community development. But “we’re getting more skeptical whether that will ever happen.”

Not everyone here is so skeptical, to be sure. With prices topping $2,000 a ton recently, many former workers still believe the smelter will open. The Chelan County PUD remains optimistic. This spring, the utility agreed to defer, for a year, most of a $67 million penalty Alcoa was contractually obligated to pay for idling the smelter.

Although some felt PUD’s hand was forced — Alcoa had made clear the penalty would make a restart economically impossible — PUD commissioners “wanted to keep that chance alive,” said PUD Chief Financial Officer Kelly Boyd.

Indeed, some here think more could have been done to support the smelter. Some say the PUD should have kept its rates down. Others fault state officials for not offering financial incentives to Alcoa, as some other states have done.

Still others blame Congress, where some lawmakers say Trump’s efforts to curb Chinese imports will hurt American consumers. “These fat-cat congressmen, they could care less whether a blue-collar worker makes it or not,” said Harold Collins, a veteran Alcoan who still hopes to get his job back. “It seems like a lot of the powers are arrayed against us.”

But many others have started imagining a future without Alcoa. As of May 2017, 40 percent of the smelter’s former workers had found new jobs, said Susan Adams, with SkillSource Wenatchee. An additional 35 percent were enrolled in college or a retraining program.

Among the latter is Clayton Verellen, 35, a former Alcoan working on a degree in environmental science. Given the smelter’s recent history, he said, “I wouldn’t want to bet my family’s future on it staying open until my retirement age.”

A Wenatchee citizens’ commission studied other former aluminum towns and developed a strategy to use the region’s still relatively cheap power to recruit new businesses. Already, that enticement has attracted several new industries — from huge data farms in neighboring Quincy to blockchain “miners,” cannabis farmers and, most promising, a few smaller-scale manufacturers.

Yet even among those ready to move on, the prospect of a future without Alcoa brings sadness. For three generations, the huge smelter converted the region’s surplus power into something increasingly rare today: solidly middle-class jobs. “You could work at that plant and be a single-income family,” Verellen said. “And there are very few places today when you have that kind of opportunity.”

Back at the smelter, Kelley Woodard is decidedly somber. Despite rising aluminum prices, the optimism he and others felt over Trump’s trade talk has given way to a sober pragmatism about the realities of an aging smelter in a fast-paced global market. For many here, the real question isn’t whether this curtailment will end, but when the next one will begin.

That uncertainty, Woodard said, is taking a toll. “A lot of my people are a little reluctant to move on, because they are hoping the plant will restart and they can get back to making the money they were making before.”

“Sometimes, even if it’s not good news, I think it’s better to know for sure.”