UPDATE:Alcoa: Don t Write-Off N America As Aluminum Producer Base

MANAMA, Bahrain, Sep 23, 2010 (Dow Jones Commodities News via Comtex) --North America shouldn't be written off as a location for future aluminum production given changes to energy supply and recent competitively priced power contract renegotiations, a senior executive at U.S. producer Alcoa Inc. (AA) told Dow Jones Newswires.

"The U.S. has changed the energy supply side of the equation by moving to shale gas resources, something that is a challenging technical exercise but that has worked," said John Thuestad, group president of Alcoa global primary products.

"We could see in the next five to 10 years that North American assets adopt new technology and a different energy base. I'm optimistic that the option of the U.S. as an aluminum smelting supply base remains," he said.

Shale gas is a natural gas produced from shale and is becoming a growing phenomenon in the U.S.

New applications of hydraulic fracturing technology and horizontal drilling has helped the development of new sources of shale gas to offset declines in production from conventional gas reservoirs, and has led to major increases in reserves of U.S. natural gas. This is especially good news for Alcoa, which had around 52% of its total production capacity of 3.56 million tons in the U.S. last year.

Like several others, the company was forced to close or curtail output at a number of its operations in the country last decade because energy prices rocketed and aluminum prices fell to around $1,400 a metric ton and lower.

The U.S. Pacific Northwest region was especially badly hit. During that period, there were even instances where facilities found it more profitable to cease aluminum production and sell on power at a premium, essentially becoming power plants.

Thuestad said that energy costs are key. "The main question is, how can we improve the aluminum production cost side to make it less expensive," he said.

"In China it is coal, in the Middle East it is gas, in Africa it is hydropower and in the U.S. and Canada it is gas and hydropower," he added.

Energy accounts for around a third of the total production cost of aluminum, a metal used in the automotive and construction industries.

The renegotiation of power contracts at favorable cost levels has also saved some of the company's capacity from permanent closure, not just in the U.S. In 2009, Alcoa secured long-term power agreements on about 2.0 million metric tons of its smelting operations in Quebec, Spain, Massena, New York, and Ferndale, Washington.

"It's been regional specific-there isn't just one prescription," Thuestad said. It sporadically works in Europe, but there's no industrial plan or energy directive from the European Union. The lack of an agreed EU carbon solution, setting out the region's main instrument to meet its objective of reducing greenhouse gas emissions by 20% by 2020 compared to 1990 levels, is "creating a lot of uncertainty while waiting for it," Thuestad added.

Heavy industries like aluminum, steel and cement have warned that the EU proposal would see would simply force them to relocate their factories and jobs outside the EU where CO2 emissions are cheaper, leading to 'leakage' of carbon dioxide emissions with no benefit for the environment.

Alcoa faces a different problem in Italy, where the fate of its two aluminum smelters in Fusina and Portovesme hangs in the balance due to uncertainty in obtaining future power supply for the smelters at competitive rates. Alcoa is appealing an EU decision that Italy's extension of the existing electricity tariff after 2005 did not comply with EU state aid rules and ordered Alcoa to repay a portion of the benefit it had received.