Metals industry jolted by electricity crisis

By Staff -- Purchasing, 3/8/2001

Surging energy costs, driven by demand from power-starved California, are forcing copper, aluminum, molybdenum and precious metal operations in the western U.S. to halt or scale back output. The U.S. power crisis has crippled Western metal producers needful of cheap energy to operate mines and electricity-guzzling smelters. As rising spot power prices coincide with expiring long-term electricity contracts and low metals prices, producers are struggling just to stay in business.

California's utilities are caught in a crunch between soaring fuel prices and a state law that holds down prices to consumers. The state's two investor-owned utilities are facing bankruptcy and rolling blackouts have temporarily shut down many small, energy-intensive businesses. Companies in California have been hit particularly hard by frequent power interruptions as the state grapples with a severe shortage of electricity. But increasingly, big electricity users throughout the West are being hurt as California saps regional power supplies, sending spot prices soaring.

Phoenix, Arizona-based Phelps Dodge, the world's No. 2 copper producer, has warned workers at its Chino and Tyrone, N.M., and Sierrita, Ariz., operations of possible production cuts because higher electricity, natural gas and diesel costs have made production too expensive. "The power situation and its domino impact on industrial operations in the western part of the United States has been severely understated," says J. Steven Whisler, PD's president. Production at these three mines represents more than a quarter of the company's copper output and accounts for about 2% of global copper production, analysts estimate. Such large production cuts could affect global copper prices. "It's a big deal," says analyst John Tumazos at Sanford C. Berstein & Co. in New York.

The Continental Pit complex near Butte, Mont., owned by Grupo Mexico (Asarco's parent) and Montana Resources, has shut because its fixed-contract power supply from Enron Corp. has expired. Continental, which mines copper, molybdenum and silver, has no plans to restart production since spot electricity costs have increased from $100 a megawatt hour to $600.

Some gold mines in California have had to synchronize their operations to the terms of power contracts. State-mandated temporary power outages have forced temporary closures, some as long as 10 hours, at Homestake Mining Co.'s 120,000-ounce-per-year McLaughlin mine in Napa County, raising the cost of production there by $10/oz.

Homestake CEO Jack Thompson says that under the mine's power agreement, it has a lower-than-spot kilowatt hour charge but its provider has the right to interrupt its electricity. Homestake is the fourth largest North American gold producer. McLaughlin is a very small part of the company's two-million-plus ounce annual production. It has had no problems in mines in Nevada and other parts of the West. Likewise, Denver-based Stillwater Mining Co., the only U.S. platinum group metals producer, operates primarily in Montana. It also has fixed power contracts, so it has ridden out the crisis.

Besides, power is not nearly as big a part of platinum mining costs as it would be for aluminum smelting where electricity-intensive aluminum potlines convert refined alumina into aluminum metal. Aluminum was the first sector of the mining industry to succumb to high power costs. As early as last spring, some smelters in the Pacific Northwest were already beginning to curtail production in the region. As last year progressed, more and more capacity was shut in the region with electricity soaring, at times, to unprecedented rates above $1,000 a megawatt hour.

Aluminum smelters had been accustomed to paying $18-$22 a megawatt hour under fixed power contracts. But, those who need to seek power above and beyond the amount allotted to them in the contract have hit a wall. For some aluminum companies, it has been more lucrative to sell electricity back to the power suppliers than to produce the metal. To date, all five primary aluminum producers operating in the region have had to cut production by some amount, with curtailments totaling over one million metric tons.