Anthony Wilson
Published: 22 Oct 2009
On September 16, the local aluminium company Alutrint held a function at the Hyatt regency Hotel in Port-of-Spain to launch a brochure on the aluminium industry in T&T.After the formal part of the function, I spoke with Energy Minister Conrad Enill and Alutrint chief executive Phillip Julien.
Here’s an excerpt of both interviews:
AW: Among the issues that have been raised by those who are opposed to the smelter is the issue of the economic viability of the Alutrint smelter project. Is it viable?
CE: The Government took the decision that we would enter into the industry and therefore in the long term it would be viable on the same basis that the Point Lisas development project is viable.
Any industry that we are getting into for the first time would require us to put into that industry a development-type input. This would be the same. But if you look globally and in the long term, the smelter would be economic.
AW: Based at what price of product?
CE: The planners of the smelter project did a number of different scenarios and the model that is going forward, both in terms of power costs and in terms of how we propose to set up the marketing arrangements, takes that into account. The details of these are available but I don’t keep that in my head.
AW: What’s the price of natural gas that, it is proposed, will be converted into electricity to run the smelter?
CE: I think there are two issues. The first issue is that we put a price that meets the requirement but secondly, there is an escalation clause in the contract such that if the commercial price goes up, then the cost of natural gas to the project goes up as well. Therefore, there is not going to be the expectation of any subsidy on the natural gas.
AW: How soon do you expect the project to be profitable as opposed to viable?
CE: It will depend. Right now, you would recognise that we are going through a series of challenges as it relates to the implementation of the project. Clearly that is going to create some cost pressures that would have to be factored in. But, by and large as most government projects go, this should be profitable in five or six years.
AW: Do you think that the public information drive that Alutrint is going on would have the effect of convincing any of the anti-smelter people?
CE: No, I don’t think the intention is to convince the anti-smelter people. The intention is simply to provide the information that we have used in arriving at the decisions. And clearly the decision that we have arrived at is based on the soundest data that is available. We talked today about those who are opposed talking about the incident in China to create some kind of impression that the Alutrint smelter is unsafe. Whereas the truth is that the Chinese incident was simply not relevant to the issue because it was not an aluminium smelter. The real issue is that there are some people who believe that the natural gas-led industrialisation process is not one that they support. And therefore it does not matter what you do, they are going to have a point of view that is different to yours. Convincing the anti-smelter people is not the intention of today’s function. The intention really is to bring balance to the discussion and to provide the facts as we know them.
The discussion with Phillip Julien was longer and more wider ranging than the discussion with Mr Enill.
AW: How has the search for a new equity partner been going?
PJ: It has been going very well, I have to leave it with the primary shareholder itself to make the formal statement on it. I am reasonably confident that you will be hearing something positive in the near future. Closure on the search should happen before the end of this year, God willing.
AW: Is it likely to be a Chinese company given the fact that they are the builders and the providers of the technology?
PJ: At this point, the People’s Republic of China are focusing their interest in making sure that the smelter construction component is built well as well as supporting it through the debt financing, which is quite substantial. In terms of their participation in the equity, that really is a question for the shareholder.
AW: Would the equity participant be a well known name?
PJ: In the industry, it is a well-known name. And without giving too much away, I would dare say that they would be known not only in the aluminium smelting industry but in the downstream use of aluminium. [Sources in Brazil’s aluminium sector confirmed that the proposed equity partner is the Votorantim group of Brazil, whose aluminium company, CBA, is Brazil’s largest aluminium producer. CBA’s reported share is 10 per cent.]
AW: One of the interesting things about Alutrint is that it may start its life without the kind of backward vertical integration that most smelters have—as in the ownership of an alumina source. What is the shareholder doing about that issue?
PJ: Alumina, which is our raw material, is always very competitively priced and it is linked to the LME (London Metal Exchange) price of aluminium. So while a completely vertically integrated producer may have some built-in advantages, it is entirely possible for a smelter, particularly with linkages to downstream, to be more than economically viable by buying alumina from various entities out there.
AW: One of the big issues for me is the issue of whether the smelter is going to be viable. And, even more to the point, whether it is going to be profitable. I would imagine that viability and profitability depend on the price of natural gas and alumina as well as the price that the final products can fetch. What can you say that would assure the reading public that Alutrint is going to be viable and eventually profitable?
PJ: Without going into details, I would like to answer that with some analogies.
We know of numerous smelters in China with similar equipment and technology to us, yet which have a much higher operating cost than us because their electricity is fuelled by coal and ours by natural gas. Yet those Chinese smelters are still able to be profitable at today’s depressed prices. There are smelters in the western world built at a much higher capital cost than Alutrint will be built. Alutrint is being built at a lower capital cost than most of the recent smelters in the western world because of the advantage of working with a Chinese design, technology and the very attractive debt financing.
So we have very attractive financing, an economically priced smelter and the country has natural gas—which is one of the more competitive raw materials for the operating cost of the smelter because power is about 30 to 35 per cent of your operating cost.
So just intuitively, from a layman’s perspective, and taking into account that the aluminium industry is cyclical, it allowed the Government to predict a conservative value when doing the overall economics of the smelter to ensure that we can ride out this cyclical storm and more importantly, play to our strength of a competitive price of power—without giving away the farm—which will place us in the lowest quartile in terms of operating cost.
AW: At today’s price of aluminium, would Alutrint be profitable?
PJ: I’m not at liberty to say what the LME price was based at. But over the course of the last four years that Alutrint has been in existence, I have never had a burning concern about whether the project would be, ultimately, viable and profitable.
AW: I would imagine that at last year’s historic peak prices, had the smelter been in operation, it would have been very profitable?
PJ: Maybe not last year. That’s something that I cogitate on regularly—if the delay in construction may ultimately redound to our benefit. The industry went through a terrible time recently and six months prior to that was the best time ever.
My take is that if we had come into production when we were slated to, we would have had a rough few months because we may have started at the peak of the cycle and would have had to ensure all the learning pains as that cycle started to come down.
That would have brought a great deal of undue stress and pressure on Alutrint, which, knock on wood, we would not have to face again in the future.
AW: So what you are saying is that the viability of the project does not depend on an astronomical price?
PJ: No never. Not at all. The beauty of the Alutrint project is the financing coming from China which allows us to have the robustness which ensures viability at a very management LME price.
AW: What is the financing from China?
PJ: It’s US$400 million in total—US$100 million in a concessionary loan and US$300 million in buyers’ credit which is more commercial. The concessionary loan is much lower than the buyer’s credit.
Source: http://guardian.co.tt/business/business-guardian/2009/10/22/alutrint-profitable-five-years
