-- The opportunity for British Columbia
-- Potential Benefits
The long-run global outlook for aluminum is strong. Industry forecasts suggest that demand for aluminum will increase by 35 percent over the next decade, to 29 million tonnes per annum. This significant growth in demand is expected to be driven by increased utilization of aluminum in automobiles, growth in the aircraft manufacturing sector, and increased use of aluminum cans for beverage packaging.
Meeting this demand will require substantial new investment in aluminum plants. After allowing for capacity already under development, and reasonable yield improvements, approximately six million tonnes of additional aluminum capacity is expected to be required over the next decade.
A. The opportunity for British Columbia
British Columbia is in a unique position to become one of the world's leading exporters of aluminum.
British Columbia's current and upcoming electric power capacity could provide enough energy for two to three new aluminum plants. A significant part of this capacity will come from the return to B.C. of 1,400 megawatts of downstream power generated by U.S. dams on the Columbia River-power which B.C. had previously sold on a long term basis. The B.C. government's "Power For Jobs" legislation will enable the Province to supply this energy to the aluminum industry at very competitive prices.
British Columbia's position on the Pacific Rim gives it excellent access to both raw materials and the world's three largest aluminum markets -- the United States, Japan and China.
British Columbia has many coastal communities which offer natural deep-water harbours. The province also has extensive infrastructure in place, which includes natural gas pipelines, as well as air, rail and port connections.
In addition, British Columbia is well known in Canada for its quality of life, with a temperate climate in its coastal regions, extensive social infrastructure for education and health care, a young, vibrant and multicultural society, and outstanding recreational opportunities.
B. Potential benefits
Three new aluminum plants would increase British Columbia's annual aluminum production capacity from 272,000 to about 940,000 tonnes-more than a threefold increase.
These new facilities would be the first major investment by this industry in British Columbia in over 40 years. Upon construction, they would represent an investment of $3.6 billion in new manufacturing capacity.
An independent study estimates that this investment would generate approximately 48,000 person-years of direct, indirect and induced employment over the construction period, and more than 6,000 permanent jobs as part of ongoing operations.
Provincial Gross Domestic Product would be increased by approximately $2.9 billion during construction, and ongoing operations at the plants would generate a total of $855 million per year in provincial GDP.
This chapter analyzes the different components of the global aluminum industry and market, with a focus on Canada's place in the overall world scene. The key areas examined in this chapter are:
A. Aluminum industry structure
The aluminum industry is comprised of firms engaged in:
Canada has no domestic sources of bauxite. Consequently, Canadian aluminum plants need to import bauxite or alumina, either mined and produced by related companies, or purchased on the open market.
B. Global market trends
1. Aluminum supply trends
Historically, new supply has entered the market in manageable increments, with a new plant typically adding about 1-2 percent to global production. However, in the past decade the dissolution of the former Soviet Union, the world's second largest producer of aluminum, suddenly provided the market with a new supplier. The collapse of demand in the former Soviet economy, and the country's need for hard currency, resulted in more than 75 percent of Soviet production being shifted from domestic consumption to the world market. This change increased the free-market supply of aluminum by more than 10 percent in the early 1990's.
This additional supply resulted in production cutbacks by "Western" aluminum producers, beginning in 1993, and a commitment in 1994 by Russian producers to curtail production. In addition, a rapid surge in demand during 1994 and 1995 helped to absorb this additional capacity. By the end of 1996, Russian production was fully integrated into the global supply and demand equation, although some idle production capacity still exists as a result of these changes.
The distribution of aluminum production in 1996 is summarized in Exhibit II-1 below.
Global production in 1997 is expected to be about 21.8 million tonnes, with idle capacity representing about 4% of production. "Western" production is expected to be about 16.1 million tonnes. "Western" production capability is expected to increase to 17.5 million tonnes by 2007, and to 19.5 million tonnes by 2015. Despite this increase, supply will still be insufficient to meet projected demand, as is outlined in the next section.
(Please note: "Western" includes all countries which have traditionally been active in the world aluminum market. This grouping includes all countries other than those classified as East-Bloc. "East-Bloc" includes countries which traditionally were not part of the world aluminum market: principally China, the former Soviet Union, and the former communist countries of Eastern Europe. However, this distinction has been substantially blurred by the fact that Russia and some Eastern European countries are now active traders in the world market.)
Aluminum production by country, 1996
2. Aluminum demand trends
The key end-use market segments for aluminum are illustrated in Exhibit II-2. Total global consumption of aluminum in 1996 was approximately 20.95 million tonnes. At a market price of US $1,505 per tonne, this translates into a consumption value of US $31.5 billion.
The largest market segment is the transportation sector which accounts for approximately 29 percent of total aluminum consumption. Demand from the transportation sector is expected to increase as a result of growing aluminum use in cars and continuing growth in the aircraft manufacturing sector. Aluminum demand growth in the auto sector alone could exceed 30 percent between 1996 and the year 2000.
The second largest segment is packaging, including beverage containers (23
percent), followed by construction (19 percent). Demand in each of these sectors
has increased in recent years, fluctuating in line with general economic cycles.
Estimated global aluminum markets, 1996
Source: Canadian Minerals Yearbook, 1996
There are also many niche market uses for aluminum, such as alloys used in the aerospace industry and microelectronics applications. These niche users do not drive the market, at present, but they do demonstrate the diverse uses and potential for aluminum in high-tech applications.
Exhibit II-3 shows the distribution of global aluminum consumption, by country. The United States is both the world's largest consumer as well as producer of aluminum. Canada is the world's ninth largest consumer of aluminum, with annual consumption exceeding more populous countries such as the United Kingdom, Mexico and India.
Exhibit II-3 also illustrates the dramatic differences in per capita consumption of aluminum. The principal difference in aluminum consumption among the industrialized nations stems from differing end-use patterns in each market, for example, the relative consumer acceptance of the aluminum beverage can as compared to other forms of beverage container.
Aluminum consumption by country, 1996
The low per-capita consumption of aluminum in the developing nations shows the potential for growth in aluminum demand in these countries. Demand is expected to increase as a result of increasing industrialization (especially in the automobile and electronics sectors), combined with rising personal income and consumption in many developing countries.
Significant potential exists for growth in aluminum consumption in the future, both through increased use of aluminum within established industrial sectors, and through expansion of those sectors in developing countries.
As illustrated in Exhibit II-4, industry projections suggest that global aluminum demand will continue to increase into the next century. Strength in the U.S. economy, combined with export-led demand in Japan and Germany, is expected to contribute significantly to the increased demand among "Western" countries.
It is not yet clear what, if any, impact the financial situation of many key Asian economies in late 1997 will have on the rate of economic growth in the region. Any significant reduction in growth rates in the region would likely result in growth in demand for aluminum being slower than has been forecast to date.
Projected growth in aluminum demand, millions of tonnes
|Projected "Western" demand||
|Plus "East-Bloc" demand||
Sources: Metal Bulletin Research, October 1997
Brook Hunt & Associates Ltd. (BHA), 1996
Resource Strategies Inc., American Metal Market, June 10, 1997
Notes: 1Before allowing for increases beyond the BHA projection for 2007 for "East-Bloc" countries
C. Global price trends
The price of aluminum is a product of both global supply and demand. Recent price trends and a range of price projections for aluminum are illustrated in Exhibit II-5.
In 1988, when global inventories of aluminum represented just 45 days of consumption, the price of aluminum was nearly US $2,600 per tonne. Conversely, in 1993, when global inventories peaked at 114 days, following Russia's entry into the global market place, average prices dropped as low as US $1,139 per tonne.
By the start of 1997, with Russian production now integrated into the world supply, prices had recovered to around US $1,500 per tonne and global inventories had fallen to around 65 days. Industry experts are projecting demand growth to outpace growth of productive capacity, leading to a stronger market in 1998 (as illustrated in Exhibit II-4), which will continue into the next millennium.
By late 1997, prices have risen to US $1,580 per tonne, but have not been rising as quickly as some earlier forecasts had predicted. Expectations for the future price of aluminum vary considerably, with optimistic projections pegging the price at US $2,500 per tonne by the end of the millennium, while pessimistic projections see the price remaining under US $2,000 per tonne.
Average primary aluminum prices, historic and range of projections
Sources: Canadian Minerals Yearbook, 1996 (historic results to
Anthony Bird Associates (UK), 1996 (high projection)
Brook Hunt & Associates Ltd., 1996 (mid projection)
AME Mineral Economics, 1996 Aluminum Study (low projection)
D. The long-term need for new aluminum production
Forecasting metals demand over the long term is an inherently risky activity. In addition to fluctuations in global and regional economic activity, another key variable is the degree to which a metal may be substituted by synthetic products, or the degree to which a metal may become a substitute for another product. All of these variables are extremely difficult to project over the long term.
Exhibit II-6 illustrates projections made by two consulting firms in the aluminum industry, which indicate that between 4.5 and 10 million tonnes of new aluminum capacity will be needed in "Western" countries over the next 18 years in order to meet expected demand. While these projections represent just two of many opinions on future demand, industry discussion papers in general look to buoyant demand for aluminum in the coming years.
The projections for the year 2015 represent an average increase in aluminum demand in the "Western" countries of between 1.4 and 2.6 percent per annum for the 18 year period from 1997. The projection for the year 2007 looks to annual demand growth within this range, at 2.1 percent per annum. These growth rates compare to the actual average growth in "Western" demand of 4.7 percent per annum between 1993 and 1996, and forecast average growth in "Western" demand of 3.4 percent per annum between 1996 and 1999. Therefore, these projections suggests that the growth rate of aluminum demand in the next millennium is going to be lower than in the current decade.
In 1996, Anthony Bird Associates (UK), an aluminum industry consulting firm, also forecast that new investment in aluminum capacity would need to increase, in part because continuing exports of Russian aluminum could not be relied on. Bird also indicated that Canada offers the most promising economics for new projects, due to low operating costs.
Projected long-term need for new aluminum production, "Western" countries
|"Western" demand (millions of tonnes)||
|Projected "Western" capacity
(millions of tonnes)
|Capacity shortfall (surplus)
(millions of tonnes)
The only major aluminum plant currently operating in British Columbia is owned by Alcan Aluminium Limited. Alcan's Kitimat plant, on the northern British Columbia coast, has an annual production capacity of 272,000 tonnes. The Kitimat plant is the largest of Alcan's seven Canadian aluminum plants, and is third largest among the eleven aluminum plants located in Canada. Kitimat represents 12 percent of Canadian aluminum production and 1.3 percent of global production. The facility at Kitimat is the only Canadian aluminum plant located outside of Quebec. The plant produces aluminum ingots, with the primary market being the Pacific Rim.
In August 1997, Alcan announced its intention, subject to economic and market conditions, to nearly double its production capacity in Kitimat by building a new $1.2 billion aluminum plant. The new facility could be operating as early as January 1, 2003, and has a planned capacity of approximately 225,000 tonnes per year.
In addition to Alcan's planned expansion, British Columbia is very well positioned to add even further to the world's aluminum supply, for the following reasons:
A. Energy availability
The largest producer of electricity in British Columbia is the British Columbia Hydro and Power Authority (BC Hydro), a provincial Crown corporation and the third largest electric utility in Canada. BC Hydro serves almost 1.5 million customers in an area containing over 94 percent of British Columbia's population.
The second major electric utility in British Columbia is West Kootenay Power Ltd., which generates and distributes power in an extensive area of southern British Columbia. West Kootenay Power is a subsidiary of US-based UtiliCorp United Inc.
Hydroelectric facilities are the main sources of electricity in British Columbia, with the main generating systems being the Columbia and Peace River systems, operated by BC Hydro, and the Kootenay River system, operated by West Kootenay Power and BC Hydro.
BC Hydro operates 35 generating stations with a total installed capacity of 10,416 megawatts. Of these stations, 32 are hydroelectric and account for 9,332 megawatts of capacity, with the only significant non-hydro generating station being the 900 megawatt natural gas-fired Burrard Thermal Station. There are no nuclear power facilities operating in British Columbia.
British Columbia's existing power capacity will be significantly enhanced over the next six years, as a result of the Columbia River Treaty. This international agreement between Canada and the United States, negotiated in the 1960's, governed the development of the Columbia River in both countries. Under a Canada-B.C. agreement, British Columbia gained access to downstream power generated by dams on the U.S. portion of the Columbia River. B.C. sold these downstream power benefits for the first 30 years.
This power is to be returned to the Province starting in 1998. By 2003 an additional 1,400 megawatts of capacity will be available for British Columbia. This represents an increase equivalent to 13 percent of BC Hydro's existing installed capacity. Of this 1,400 megawatts, the B.C. Government has committed to providing 200 megawatts to new smaller industrial investors through a competitive bidding process. No formal structure has been created for allocation of the remaining 1,200 megawatts, giving the Province significant flexibility in negotiating how this power is to be allocated.
Besides the downstream benefits, approximately 300 megawatts are expected to be available from other domestic sources. In addition to B.C. generation, electric transfer capabilities are 3,000 megawatts to/from the U.S. and 1,000 megawatts to/from Alberta. This transfer capability allows access to the broader West Coast power market.
The overall power supply available in British Columbia, once all downstream benefits are received, will be significantly in excess of demand. This leaves B.C. very well positioned to help meet the world's need for additional aluminum, as sufficient power supply will exist for the development of further aluminum production capacity within the province. Depending on the size of the plant, British Columbia will have sufficient electric power for two to three new aluminum plants, in addition to the current Kitimat capacity.
B. Energy costs
1. General electricity prices
Exhibit III-2 illustrates the typical price per kilowatt hour for a major electric user in British Columbia, and in each of the three Pacific States of the U.S. These prices reflect the general schedule rates applicable to major industrial users, and are generally reflective of the relative underlying costs of producing power in each jurisdiction. However, actual power costs privately negotiated for very large power consumers, such as aluminum plants, may differ significantly from the figures shown here.
Based on schedule rates, BC Hydro rates offer a significant saving over electric costs in each of the other cities examined, with B.C. prices being 28 percent lower than in Seattle, 35 percent lower than in Portland, and 51 percent lower than in San Francisco.
Average electric price, large industrial users, May 1, 1997
Note: Based on peak demand of 50 megawatts at 85% load factor
Source: Hydro Quebec, Comparison of Electricity Prices in Major North American Cities, 1997
2. The "Power for Jobs" initiative
British Columbia's ability to access the downstream power benefits from the Columbia River Treaty will increase the available power capacity in the province by about 1,400 megawatts by 2003. This power will become available at minimal additional cost to the province, and without the need to build any new generating capacity. Thus, there is a significant opportunity for British Columbia to price this additional power so as to encourage economic development within the Province.
The Government of British Columbia committed itself in early 1997 to use the abundant supplies of hydroelectricity to attract new strategic investments and create new jobs. In July 1997, the Government enacted legislation for the Power For Jobs Development Act, which will make this power available to new or expanded facilities which create new jobs and provide overall economic and social benefits to the province. For these projects, power will be made available at a new development power rate, which will provide greater flexibility than BC Hydro's already-competitive standard rates.
This Act will provide the Government with the flexibility to negotiate specific agreements with major aluminum companies to meet the objectives of both the investing companies and the Province.
Exhibit III-3 summarizes the significant job-creation and GDP growth potential for British Columbia if up to three new aluminum plants are constructed in the province.
Economic impact of new aluminum plants in British Columbia
|Potential number of new aluminum plants||
|Construction phase (3 years)|
|Ongoing operations (per annum)|
Note: Assuming 225,000 tonnes per annum plant
Estimates include direct, indirect and induced impacts
Source: Financial Impact Analysis of BC/Alcan 1997 Agreement, RBC Dominion Securities, 1997
C. Pacific Rim location
British Columbia's location on the west coast of North America places it in an excellent strategic location, both for the receiving of bauxite or alumina shipments and for the shipping of aluminum ingot to major consumers.
1. Access to bauxite and alumina
For raw material supply, the major bauxite and alumina producing regions of the world are:
Being located on the West Coast of North America, B.C. offers convenient and direct shipping access from Australia, the world's largest producer of both bauxite and alumina. The Panama Canal also provides relatively convenient access from the major production regions of the Caribbean and South America.
2. Access to aluminum markets
As described earlier, the United States and Japan are two of the world's leading aluminum-consuming nations. In addition, the general growth trend being experienced by the economies of South-east and East Asia is likely to result in other nations in the region increasing in significance as consumers of aluminum. B.C. offers excellent access to all of these markets.
For export into the North-east Asia market area, B.C. has shorter delivery times to market than any other location in North America except Alaska. Sailing times from B.C. ports to Korea and Japan are up to two days shorter than from major West Coast ports in the U.S. Sailing time from Vancouver to Japan is just 11 days, with this crossing being even faster from ports located on the central and north B.C. Coast. Exhibit III-4 illustrates B.C.'s excellent location for Asia-Pacific trade.
British Columbia's location relative to Asia-Pacific markets
Geography is not the only factor that makes British Columbia an outstanding location for carrying on trade in Asia. With many personal and business connections into Asia, B.C. represents a natural gateway for trade between North America and Asia, with Vancouver at the hub. In 1995, 80 percent of all immigrants arriving in Vancouver were arriving from Asia, and Chinese is now the second most common language spoken in Greater Vancouver, after English.
In November 1997, Vancouver hosted the annual Asia-Pacific Economic Cooperation (APEC) forum, with leaders from 18 nations in attendance. The 1997 World Chinese Entrepreneurs Conference was also hosted in Vancouver, the first time this event has ever been held outside of Asia.
For the U.S., B.C. is already an integral part of the US $1.2 trillion West Coast market represented by B.C., Washington, Oregon and California. B.C.'s road and rail infrastructure is fully integrated with that of the U.S. and the common time zone also facilitates business dealings. This market area includes at least one major aluminum consumer, the Boeing aircraft manufacturing facilities located in Seattle, WA.
D. Transportation infrastructure
1. Ports and deep-water terminals
British Columbia has an extensive system of ports and deep-water terminals, all of which are ice-free.
The Port of Vancouver is Canada's largest port. Measured in terms of cargo volumes, the Vancouver port is the same size as the three busiest U.S. ports: New York, Los Angeles and Long Beach, each of which handles approximately 59 to 63 million tonnes of cargo annually.
Many coastal areas of British Columbia would be extremely well suited to an aluminum plant, and have access to deep-water marine terminals. Deep sea channels provide access to many communities, mainly located on the sheltered waters of long inlets and inter-coastal waterways. In total, 24 communities in B.C. are served by deep-water ports of varying sizes. Many of these communities are already home to major industrial facilities, including pulp and paper mills, saw mills, and an aluminum plant.
Vancouver International Airport (YVR) is Canada's second largest airport, and has recently spent $500 million on a major expansion.
More than 20 international airlines use YVR to service destinations in Asia, Europe, the South Pacific and North and Latin America. International passenger traffic has seen outstanding growth in the past decade, and international passengers are projected to increase from 2.1 million in 1994 to 4.0 million in 2005.
International air cargo at YVR is growing at 16 percent per year, and the Asia Pacific region now accounts for 36 percent of air cargo. Dramatic growth is projected for international air cargo, from 64,000 tonnes in 1994 to 134,000 tonnes in 2005, largely from increased Asia Pacific trade.
National and provincial rail lines (CN, CP and BC Rail) link British Columbia's industrial centres to terminal points across Canada. In addition, five U.S. rail lines including Burlington Northern and Union Pacific, serve the southern part of the province. Freight transfer is handled through computerized traffic management and integrated intermodal terminals at main rail points. The railways have undertaken major investment programs to maintain and upgrade their heavy freight systems in British Columbia.
1. Labour availability
British Columbia's workforce totals almost two million, with an annual growth rate that has averaged 2.6 percent during the past five years. The labour force in B.C. is growing substantially due to both inter-provincial and international immigration. As a result of economic opportunity and an attractive living environment, British Columbia receives a share of new Canadians significantly in excess of its relative share of the national population.
Sixteen percent of the province's workforce is under 24 years of age, and 54 percent is between 25 and 44 years of age. This age profile provides a good balance between experienced, mature workers and entry-level workers.
2. Labour quality
Canada is one of the best educated countries in the world, and, as shown in Exhibit III-5, B.C. is above the Canadian average.
Educational attainment, population aged 15 years+, B.C. and Canada
|High school, no certificate||
|High school, with certificate||
|Some college/university, no certificate/diploma||
|College/university, with certificate/diploma||
|University, with degree||
Source: 1991 Census
These figures show that British Columbians are more likely to graduate from high school, and having graduated, are more likely to continue with further education.
3. Labour costs
Salary and wage costs in the province are very competitive with those in the western United States. In a 1997 survey of business costs in 42 international cities(1), KPMG found that salary and wage costs for the eight manufacturing and processing sectors examined were an average of 8 percent lower in Vancouver, B.C. than in Bellingham WA, and 12 percent lower than in Sacramento CA.
British Columbia also enjoys a distinct advantage over the U.S. in terms of the costs of statutory and non-statutory benefits:
The advantages B.C. enjoys over neighbouring U.S. states in terms of salaries and wages, statutory benefits, and non-statutory benefits, collectively make labour costs in British Columbia extremely competitive in comparison to U.S. locations.
F. Social infrastructure and cultural amenities
British Columbia is the fastest-growing region of Canada. While a full discussion of British Columbia's social infrastructure and cultural amenities is beyond the scope of this document, some of the highlights include:
Stuart MacKay, Partner
Suite 900-777 Dunsmuir
Vancouver, BC V7Y 1K3
Phone: (604) 691-3410
Fax: (604) 691-3031
Alcan Smelters and Chemicals, Kitimat Works' Contribution to the Economy of British Columbia: 1996, Coopers & Lybrand Consulting, April 1997 Aluminum 1997, AME Mineral Economics, 1997 Aluminum Metal Service Executive Report, Brook, Hunt and Associates Ltd., 1995 Aluminum Report, Brook, Hunt and Associates Ltd., 1996 Financial Impact Analysis of BC/Alcan 1997 Agreement, RBC Dominion Securities, 1997 Industry Information Sources
Alcan Facts, Alcan Aluminium Ltd., 1997 An Overview of the Columbia River Treaty, BC Hydro, 1995 Company Info, West Kootenay Power, 1997 Daily Prices, London Metal Exchange, various dates Quick Facts, BC Hydro,1997 Journals and Periodicals
Canadian Minerals Yearbook, Natural Resources Canada, 1996 Nonferrous Metals Outlook, Natural Resources Canada, November 1996 Primary Aluminum Monthly, Metal Bulletin Research, October 1997 U.S. Industry and Trade Outlook: 1998, DRI/McGraw Hill and Standard & Poor's, 1997 World Economic Outlook, International Monetary Fund, October 1997 World Fact Book, U.S. Central Intelligence Agency, 1996 Articles
Aluminum: Changes and Challenges, Mining Journal, London, October 3, 1997 Aluminum Capacity Shortage Anticipated by 1998/99, Metal Bulletin, April 11, 1996 Varied Views on Aluminum, Mining Journal, London, May 30, 1997 Press Releases
Alcan Aluminium Ltd. Announces Downturn in Asia, Alcan Aluminium Ltd., October 1, 1997 Alcan Appoints Director for Kitimat Smelter Expansion Study, Alcan Aluminium Ltd., October 9, 1997 BC-Alcan Agreement Sets Stage for Job Creation, Environmental Enhancement in Province's North, Province of British Columbia and Alcan Aluminium Ltd., August 5, 1997 Premier Announces Power for Jobs Initiative, Province of British Columbia, June 26, 1997 Speeches
Aluminum as a Global Industry: Changes and Challenges, E.N. Santos, Executive VP South America, Alcan Aluminium Ltd., before Metal Bulletin's 12th International Aluminum Conference, Rio de Janeiro, September 8, 1997 Increasing Value of Alumax, L.B. Frost, Senior VP and CFO, Alumax Ltd., before the Alumax Aluminum Review, New York City, December 4, 1996 More Aluminum Smelters Needed, R.G. Adams, President, Resource Strategies Inc., before the Alumitech '97 Conference, Atlanta, May 20, 1997 The State of the Aluminum Industry, J. Bougie, President and CEO, Alcan Aluminium Ltd., before the Aluminum Extruders Council, Naples, FL, March 14, 1997