Bluegrass Beacon: EPA rules threaten aluminum’s revival

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Aluminum may not cost as much as it did when special guests at banquets hosted by Napoleon III were offered a prized set of cutlery made from the metal while less-favored guests used knives and forks laden only with gold.

However, its value to Kentucky’s economy – and threats looming against it on the horizon – must be understood.

I reported in July 2012 that the Environmental Protection Agency’s regulatory jolts cast a net much wider than just over the coal mines the Obama administration promised to bankrupt.

The EPA’s proposed rules fired in the direction of Kentucky’s new and existing power plants also threaten the aluminum industry, which is attracted to regions where energy supplies are plentiful and cheap. Thus, the Bluegrass State – which has lots of coal and some of the lowest electric rates in the nation – has proven so attractive to the industry that nearly 40 percent of America’s aluminum is produced within our borders.

Just a few short years ago, not only were Century Aluminum and Rio Tinto-Alcan considering shutting down their two Kentucky smelters, but the commonwealth itself questioned whether the industry deserved help.

A 2012 report commissioned by the General Assembly concluded that in light of rising electric rates, competitive factors, the location of new smelters (China now has 120 smelters compared to the United States’ 15 such facilities, two of which are in Kentucky) and “the long-term decline of the smelter industry in the U.S., a reasonable person might wonder whether the U.S. smelter business is a good long-term bet.”

Yet the aluminum industry less than three years later is enjoying a renaissance unlike any other segment of Kentucky’s manufacturing landscape.

The industry not only kept its doors open, but it’s expanding  – not because of handouts from Frankfort, but due to some old-fashioned market magic reflecting the automotive industry’s desire for lighter-weight auto parts.

InsiderLouisville’s David Serchuk reports in an article entitled “Aluminum: Kentucky’s fast-growing stealth mega-industry” that we’re in the “beginning stages of sea changes that will result in far more cars and trucks being made of aluminum, not steel.”

Serchuk reports that the Kentucky Center for Economic Development projects the use of aluminum sheet for vehicle bodies will “increase from 200 million pounds in 2012 to 4 billion pounds by 2025.”Contributing to such growth are plans by Ford to build the newest edition of its iconic F-150 pickup truck mostly from aluminum, resulting in a vehicle 700 pounds lighter with improved fuel economy.

Serchuk reports that aluminum production accounted for $2 billion in Kentucky’s 2013 gross domestic product, employed 20,000 Kentuckians, more than twice the bourbon industry, and paid an average – average – wage of $86,000.Still, while talk of closing down smelters has faded, it hasn’t completely disappeared.

Lurking in the shadows are ongoing concerns about whether the EPA’s power-plant regulations, which remain “proposed” at this point, will be enacted and demonstrate that supply drives demand in reverse as well: less coal means higher electricity costs – at least 17 percent higher, according to the National Economic Research Associates.

Increased demand in the marketplace granted Kentucky’s aluminum industry a reprieve from concerns it would be forced to close its doors because of higher energy rates caused by mine closures. Still, the EPA’s stifling regulations have yet to move from the proposal stage to actual implementation.

What could happen to the commonwealth’s aluminum industry – because of what might happen to our coal industry because of what might happen to other manufacturers – when those rules actually are executed?

The very real possibility exists that an industry just beginning to flourish again might still be forced to close its smelters and move from rural Kentucky to the vast mainland of China.

Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at jwaters@freedomkentucky.com. Read previously published columns at www.bipps.org.