Has a deal involving Santos (STO) and a major gas supply contract to Alcoa’s Western Australian operations pre-empted a review the aluminium giant announced on Friday night of its global smelting and refining businesses?
Santos said yesterday that it had finalised a deal to supply gas to Alcoa, the biggest gas user in Western Australia and, in the process, signed a new customer for gas from its John Brookes field in the Carnarvon Basin north of Perth.
The deal is for the supply of 82 petajoules of gas to Alcoa over an initial five year period, with the ability for the contract to be extended by mutual agreement for another 10 years in two separate extensions.
Santos didn’t give any idea of the value of the deal, but the company’s Western Australia & Northern Territory general manager Brett Woods described the deal as “significant” for Santos and signalled it could lead to further similar deals.
“I am confident it will set the foundation for a long, fruitful association between the two companies allowing for other gas supply opportunities to be explored,” Mr Woods said in a statement to the ASX.
But on Friday night in New York, Alcoa revealed plans for a global review of its aluminium smelting and alumina refining operations.
In WA, Alcoa operates the Kwinana, Pinjarra and Wagerup alumina refineries, as well as the world’s largest bauxite mine at Huntly, near Dwellingup, and the Willowdale mine east of Waroona.
Alcoa said the review would cover 500,000 tonnes a year of smelting capacity and 2.8 million tonnes of refining capacity “for possible curtailment or divestiture”.
That means around 14% of Alcoa’s global smelting capacity and 16% of its refining capacity will be included in the review.
“Potential actions include full shutowns of plants, curtailment of production or sales, with decisions to be announced as reviews are completed,” Alcoa said.
Since 2007 Alcoa has already curtailed, closed or sold 1.3 million tonnes a year of its highest cost smelting capacity, representing 31% of its total capacity. That has included the Point Henry Smelter in Geelong.
Alcoa’s partner Alumina Ltd (AWC) told the ASX yesterday in a separate announcement that the latest review does not include the companies’ jointly-owned Portland smelter in Victoria.
According to some US reports, the Wagerup refinery is vulnerable in any review. But analysts wonder why the management would sign a new major raw material supply contract with Santos lasting five years at least, if there was going to be a closure of reduction in operating capacity in WA.
Alcoa’s president of global primary products, Bob Wilt, said in Friday’s statement that the company was aiming to create a lower cost business.
"Our goal is to move down the global aluminum cost curve to the 38th percentile and the global alumina cost curve to the 21st percentile by 2016," he said in a statement in the US on Friday.
"The results from this review will help achieve those goals. We’ll take action only after a thorough strategic review to determine the best outcome for our shareholders and in consultation with our stakeholders."
Santos shares fell 4.1% to $7.52 in yesterday’s sell-off and as world oil prices again weakened. Alumina shares eased 3.4% to $1.71.
