EPA-230/1-73-D18
SEPTEMBER 1973
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
THE NON-FERROUS METALS INDUSTRY
(Aluminum)
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 20460
\
ui
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This document is avaiUhlr in limited quantities through the
U. S. Environmental Protection Agency, Information Center,
Room W-327 Waterside Mall, Washington, D. C. 20460.
The document will subsequently be available through the
National Technical Information Service, Springfield, Virginia
22151.
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ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
NONFERROUS METALS INDUSTRY - ALUMINUM
Report to
U.S. ENVIRONMENTAL PROTECTION AGENCY
SEPTEMBER, 1973
B, Err7lrora>.
rotection
-------
This report has been reviewed by EPA and approved for
publication. Approval does not signify that the con-
tents necessarily reflect the views and policies of the
Environmental Protection Agency, nor does mention of
trade names or commercial products constitute endorse-
ment or recommendation for use.
"^
ii
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PREFACE
The attached document is a contractors' study prepared for the Office
of Planning and Evaluation of the Environmental Protection Agency ("EPA").
The purpose of the study is to analyze the economic impact which could
result from the application of alternative effluent limitation guidelines
and standards of performance to be established under sections 304(b) and
306 of the Federal Water Pollution Control Act, as amended.
The study supplements the technical study ("EPA Development Document")
supporting the issuance of proposed regulations under sections 304(b)
and 306. The Development Document surveys existing and potential waste
treatment control methods and technology within particular industrial
source categories and supports promulgation of certain effluent limitation
guidelines and standards of performance based upon an analysis of the
feasibility of these guidelines and standards in accordance with the
requirements of sections 304(b) and 306 of the Act. Presented in the
Development Document are the investment and operating costs associated with
various alternative control and treatment technologies. The attached
document supplements this analysis by estimating the broader economic
effects which might result from the required application of various control
methods and technologies. This study investigates the effect of alterna-
tive approaches in terms of product price increases, effects upon employ-
ment and the continued viability of affected plants, effects upon foreign
trade and other competitive effects.
The study has been prepared with the supervision and review of the
Office of Planning and Evaluation of EPA. This report was submitted in
fulfillment of Contract No. 68-01-1541, Task Order No. 9 by Arthur D. Little,
Inc. Work was completed as of October 23, 1973.
This report is being released and circulated at approximately the
same time as publication in the Federal Register of a notice of proposed
rule making under sections 304(b) and 306 of the Act for the subject
point source category. The study has not been reviewed by EPA and is not
an official EPA publication. The study will be considered along with
the information contained in the Development Document and any comments
received by EPA on either document before or during proposed rule making
proceedings necessary to establish final regulations. Prior to final
promulgation of regulations, the accompanying study shall have standing
in any EPA proceeding or court proceeding only to the extent that it
represents the views of the contractor who studied the subject industry.
It cannot be cited, referenced, or represented in any respect in any such
proceeding as a statement of EPA's views regarding the subject industry.
iii
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TABLE OF CONTENTS
LIST OF TABLES AND FIGURES
PART I: EXECUTIVE SUMMARY
A. PURPOSE & SCOPE
B. PRIMARY ALUMINUM INDUSTRY
C. BAUXITE REFINING INDUSTRY
D. SECONDARY ALUMINUM SMELTING AND
REFINING INDUSTRY
E. FORMAT
1-1
1
2
5
7
7
PART II:
BAUXITE REFINING
A. INTRODUCTION
Raw Materials
Bauxite Refining
INDUSTRY SEGMENTS
i.
2.
1. Types of Firms
2. Types of Plants
3. Segmentation
C. FINANCIAL PROFILES
1. Aluminum Company of America
2. Kaiser Aluminum & Chemical
Corporation
3. Martin Marietta Aluminum, Inc.
4. Revere Copper and Brass, Inc.
5. Reynolds Metals Company
6. Capital Availability
D. PRICE EFFECTS
1. Determination of Prices
2. Costs of Production
3. Purchase Contracts
E. ASSESSMENT OF ECONOMIC IMPACT
F. IMPACT ANALYSIS
1. Proposed Guidelines
2. Costs
3. Industry Segmentation
4. Basis for Analysis
5. Price Effects
6. Financial Effects - Corporate
Impact
II-l
1
1
3
8
8
11
19
19
20
30
32
36
42
45
45
48
55
58
58
59
59
59
61
65
68
iv
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PAGE
7. Production Effects 69
8. Balance of Payments 69
9. Employment Effects 69
10. Construction of New Plants 72
G. LIMITS OF THE ANALYSIS 72
1. Accuracy 72
2. Range of Error 72
3. Critical Assumptions 72
4. Questions Remaining to be
Answered 73
PART III: SECONDARY ALUMINUM SMELTING AND
REFINING INDUSTRY III-l
A. INTRODUCTION 1
B. INDUSTRY DESCRIPTION 1
1. Collecting, Sorting and trans-
porting 2
2. Presmelting preparation 4
3. Smelting 5
4. Tapping the Furnace 11
5. Product Line 12
C. RECENT TECHNOLOGICAL CHANGES 13
1. Scrap Processing 13
2. Smelting 14
D. INDUSTRY SEGMENTS 15
1. Segmentation of the Industry 16
2. Types of Firms 17
3. Types of Plants 21
4. Percent of Industry Represented
by Each Segment 23
E. FINANCIAL PROFILES 25
1. Profits 28
2. Annual Cash Flow 28
3. Market Value of Assets 29
4. Cost Structure 29
5. Constraints on Financing
Additional Capital 30
F. IMPACT ANALYSIS 31
1. Approach 34
2. Costs 34
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PAGE
3. Impacted Segments 34
4. Price Effects 38
5. Financial Effects 39
6. Production Effects 39
7. Employment Effects 39
8. Resultant Community Effects 40
G. LIMITS OF THE ANALYSIS 41
1. Accuracy 41
2. Range of Error 41
3. Critical Assumptions 41
4. Questions Remaining to be
Answered 42
PART IV: APPENDIX IV-1
vi
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LIST OF TABLES
TABLE NO. PAGE
1-1 Costs Required to Meet Proposed Air Emission
Standards Primary Aluminum Industry 1-3
1-2 Recommended Effluent Limitations for Waste-
water from Primary Aluminum Operations I-A
1-3 Costs Required to Comply with Proposed Waste-
water Effluent Limitations for the Primary
Aluminum Industry 1-6
II-l World Bauxite Reserves, 1972 (Thousand
Xong Tons) II-2
II-2 Mine Production of Bauxite in the United
States (Thousand Long Tons) II-4
II-3 Bauxite Refining Companies in the United
States II-9
II-4 Bauxite Refining Plants in the United States 11-10
II-5 Reference Data on Major Primary Aluminum
Producers 11-21
II-6 Financial performance data on Major Primary
Aluminum Producers 11-22
II-7 Selected Financial Data: Major U.S. Aluminum
Companies 11-23-24
II-8 Alcoa and Consolidated Subsidiaries Statement
of Consolidated Income 11-28
II-9 Aluminum Company of America Long-Term
Obligations (December 31, 1972) 11-29
11-10 Kaiser Aluminum and Chemical Corp. Financial
Data 11-31
11-11 Kaiser Aluminum & Chemical Corporation Long-
Term Obligations (December 31, 1972) 11-33
11-12 Martin Marietta Corp. 11-34
11-13 Martin Marietta Aluminum, Inc. Long-Term
Obligations 11-37
vii
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LIST OF TABLES CONT'D.
TABLE NO. PAGE
11-14 Revere Copper and Brass, Inc. Sales by
Product Class 11-40
11-15 Revere Copper and Brass, Inc. Consolidated
Summary of Operations 11-41
11-16 Reynolds Metals Company Net Sales 11-44
11-17 Reynolds Metals Company Property Additions
and Retirements I1-46
11-18 U.S. Imports for Consumption of Bauxite 11-50
11-19 U.S. Imports of Alumina for Use in Producing
Aluminum 11-51
11-20 Average value of U.S. Imports of Bauxite, 1971 11-52
11-21 Average Value of U.S. Imports of Alumina
for use in Producing Aluminum, 1971 11-53
11-22 Domestic Mine Production of Bauxite 11-54
11-23 General Production Costs for alumina
(Trihydrate) 11-56
11-24 Estimated Investment and Operating Costs
for Total Impoundment 11-60
11-25 Estimated Investment and Operating Cost
For Total Impoundment By Industry Segment 11-63
11-26 Related Information on Costs for Total
Impoundment 11-64
11-27 General Production Costs for alumina
(Trihydrate) 11-66
11-28 Average Value of U.S. Imports of Alumina
For use in Producing Aluminum, 1971 11-67
11-29 Annual Capacity of Alumina and Percent of
Total Industry Represented by each Segment,
1973 11-70
11-30 Employment and Percent of Total Industry
for each Segment, 1973 11-71
viii
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LIST OF TABLES CONT'D
TABLE NO. PAGE
III-l Classifications III-3
III-2 Secondary Aluminum Smelters 111-18-19
III-3 Percent of Value of Shipments of Ingots and
Billets Accounted for by the Largest Companies
1963 and 1967 111-20
III-4 Plants, Employees, and Production and Percents
of Industry Totals Represented by each Segment 111-24
III-5 Measures of Financial Performance of Secondary
Aluminum Industry Smelting Industry Based on
1967 Bureau of Census Data 111-27
III-6 Recommended Effluent Limitations for Fume
Scrubber Wastewater Generated During Chloring
Demagging to be Achieved by July 1, 1977,
Based on the Best Practicable Control Technology
Currently Available 111-32
III-7 Recommended Effluent Limitations for Wastewater
from Residue Milling to be Achieved by July 1,
1977, Based on the Best Practicable Control
Technology Currently Available 111-33
III-8 Costs for Meeting Proposed Effluent Guidelines
Secondary Aluminum Smelting 111-35
III-9 Industry Segments 111-36
111-10 Plants, Employees, and Production and Percents
of Industry Totals Represented by Each Segment 111-37
ix
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LIST OF FIGURES
FIGURE NO. PAGE
II-l Aluminum Company of America - Growth History
of Domestic Bayer Plants 11-12
II-2 Kaiser Aluminum and Chemical Corporation -
Growth History of Domestic Bayer Plants 11-13
II-3 Martin Marietta Aluminum,.Inc. - Growth
History of Domestic Bayer Plants 11-14
II-4 Ormet Corporation - Growth History of
Domestic Bayer Plants 11-15
II-5 Reynolds Metals Co. - Growth History of
Domestic Bayer Plants 11-16
II-6 Price History of Primary Aluminum 11-49
II-7 U.S. Bayer Plants - Estimates of Capital
Investment Versus Capacity - 1973 11-62
III-l Geographic Distribution of Secondary Aluminum
Smelters in the United States 111-22
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PART I - EXECUTIVE SUMMARY
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I. EXECUTIVE SUMMARY
A. PURPOSE AND SCOPE
This study is aimed at supplying the Environmental Protection
Agency with information regarding the economic impact of the costs
of pollution abatement requirements under the Federal Water Pollution
Control Amendments of 1972 for each of the three standards under
consideration:
1. Proposed Best Practicable Technology (B.P.T.) - to be
met by industrial dischargers by 1977.
2. Proposed Best Available Technology (B.A.T.) - to be
met by 1983.
3. Proposed New Source Performance Standards (N.S.P.S.) -
to be applied to all new facilities (that discharge
directly to navigable waters) constructed after the
promulgation of these guidelines (approximately January
1, 1974).
The scope of this study is concentrated on specific parts of the aluminum
industry, namely:
• SIC 2819 - Bauxite Refining Only
• SIC 3334 - Primary Aluminum Production
• SIC 3341 - Secondary Smelting and Refining of
Nonferrous Metals (aluminum and aluminum
base alloys only).
At the outset of the study, an initial examination was made to
determine which of the above three areas of the aluminum industry deserved
more attention from the standpoint of potential water pollution problem.
A cursory examination revealed that primary aluminum production had a
lower water requirement than do the other two areas. For this reason
and others discussed later, it was decided to concentrate the available
time and effort on the economic Impact of the proposed water pollution
standards on the bauxite refining industry and the secondary aluminum
smelting and refining industry. A summary of the initial examination
of the primary aluminum sector is included in this summary.
1-1
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B. PRIMARY ALUMINUM INDUSTRY
1. Air Pollution
Of major concern to the primary aluminum industry are proposed
air pollution standards. The air pollution standards for existing
sources are being set so that there will be a net emission to the atmos-
phere of two pounds of fluoride per ton of aluminum produced. This standard
was established on the basis of using a dry scrubbing system on the pot
line off-gases. There is adequate data on pre-bake pot lines (the Alcoa
398 process) that shows that this is achievable and apparently there is
also extensive European data and limited U.S. data on vertical stud
Soderberg pot lines to indicate that they would also not have any problem.
As far as horizontal stud Soderberg plants are concerned, at least one
plant feels reasonably confident that a dry scrubbing system will be
successful. If not, they would be forced to go to a wet system probably
using higher pressure drop scrubbers than they have at the present time.
Thus, indications are that the air pollution problems will be solved
by a dry process and will not create a water pollution problem.
Costs
Table 1-1 presents order-of-magnitude estimates of capital invest-
ment and annual costs required for the primary aluminum industry to meet
the proposed air quality regulation of two pounds of fluoride emitted
to the atmosphere per ton of aluminum produced. The costs are presented
according to cell type; pre-bake, horizontal stud Soderberg, and vertical
stud Soderberg cells. From Table 1-1, it can be seen that the annual costs
of air pollution control for the entire industry is approaching lc/lb.
of aluminum produced.
2. Water Pollution
The trend in air pollution control is toward the use of dry scrubbers,
thus,eliminating a potential water pollution problem. For this reason,
there seems to be less concern in industry about water pollution than
about air pollution.
The water pollution regulations proposed by the Effluent Guideline
Development Document are summarized in Table 1-2. These regulations are
a product of the work the EPA has done in contacting the industry and
determining what the industry is capable of doing.
Costs
Costs for complying with the above proposed regulations were developed
by the EPA and are presented in Table 1-3. The costs are not additive,
1-2
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TABLE_I-1
COSTS REQUIRED TO MEET
PROPOSED AIR EMISSION STANDARDS
PRIMARY ALUMINUM INDUSTRY
Cell Type
Pre-bake
Horizontal Stud
Soderberg
Vertical Stud
Soderberg
Totals
Industry Capacity
(Million Ibs/yr.)
6,222
2,122
902
Capital Investment Annual Cost
Million $ c/lb. Million $c/lb,
9,246
171
123
29
323
2.75
5.8
3.25
3.5
48
34
90
0.77
1.6
0.9
0.97
SOURCE: ADL Estimates
1-3
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TABLE 1-2
RECOMMENDED EFFLUENT LIMITATIONS
FOR WASTEWATER FROM PRIMARY
ALUMINUM OPERATIONS
( Ib/lOOOlb. of Aluminum Produced)
PARAMETER B.P.T. B.A.T. N.S.P.S,
Fluoride 1 0.05 0.025
Suspended Solids 1.5 0.1 0.05
Oil and Grease 0.25 0.015 0.015
Cyanide 0.005 0.-005 0.005
pH 6-9 6-9 6-9
SOURCE: Effluent Guideline Development Document
1-4
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i.e. the cost presented to meet B.A.T. is the total cost required and
is not added to the previous number for B.P.T.
When comparing these costs to those presented earlier for compliance
wich the air pollution regulations, it is obvious that the costs for
water pollution control in the primary aluminum industry are significantly
less than those applied to air pollution control.
Because of the less significant cost of water pollution control and
because of industry's de-emphasis of water pollution problems as opposed
to air pollution problems, this study has been focussed toward the economic
impact of proposed water pollution regulations on the bauxite refining industry.
However, the possibility still exists that the individual states may set
more rigid air quality limitations beyond the capabilities of dry scrubbers.
If this occurred, the primary aluminum smelters would have to install wet
scrubbers (for example, for cleaning pot room air) and, as a result, would
be faced with a water problem plus increased air pollution control costs.
This could be very serious if the investment had already been made in one
type of pollution control system which might become absolete. This would
also increase the total pollution related cost impact on the primary alumi-
num industry.
C. BAUXITE REFINING INDUSTRY
All three proposed standards are identical for this industry. Two
plants within the bauxite refining industry will be significantly impacted
by the proposed guidelines. These two plants are owned by one aluminum
company and the output from these two plants represents more than 74%
of the company's alumina supply for producing primary aluminum.
The proposed standards will result in added annual costs of 0.7c/lb.
of aluminum produced which is significant. This cost places the plants
into a "gray area" where the management would have to assess the future
viability of the plants and consider a wide variety of alternatives. Thus,
the closing of these plants cannot be predicted with certainty.
This cost cannot be passed-on to the consumer since the two plants
sell a portion of their product to other producers and the plants repre-
sent only 24 percent of the industry capacity. Any increase in price
would place them in an unequal competitive position. Therefore, costs
must either be absorbed or the plants will close.
1-5
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TABLE 1-3
COSTS REQUIRED TO COMPLY WITH
PROPOSED WASTEWATER EFFLUENT
LIMITATIONS FOR THE PRIMARY
ALUMINUM INDUSTRY
(C/lb. of Aluminum Produced)
GUIDELINE CAPITAL INVESTMENT ANNUAL COST
B.P.T. O.A5 0.21
B.A.T. 0.52 0.24
SOURCE: Environmental Protection Agency
1-6
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D. SECONDARY ALUMINUM SMELTING AND REFINING INDUSTRY
1. Impact of the B.P.T. Standards
There will be small increases in annual costs due to the proposed
B.P.T. standards. These costs are less than 0.5c/lb. of product and
in most cases are less than 0.2c/lb. Because of the strong competitiveness
of the industry, the costs cannot be passed-on to the consumer but must
be absorbed by the plants affected. However, this will not result in
any plant shutdowns.
2. Impact of the B.A.T. Standards
The impact of the proposed B.A.T. standards will be to close the
segment of the industry having to do with the wet processing of drosses.
This involves the closing of three small plants, one large plant, and
two wet dross departments in larger plants.
These closings would result in a loss of about three percent of
the secondary aluminum industry's production capacity and a loss of a
total of about 160 jobs or about three percent of the industry's employment,
3. Impact of the N.S.P.S. Standards
The proposed N.S.P.S. standards are identical to those for B.A.T.
Therefore, the resultant impact will be to discourage the construction
of new wet dross processing plants and favor dry processing approaches.
E. FORMAT
The following economic impact study is presented in two principal
parts, not including the Executive Summary (Part 1) and the Appendix
(Part IV). Part II of the study deals with the economic impact of
proposed water pollution regulations on the bauxite refining industry
while Part III analyzes the economic impact of a different set of water
pollution regulations on the secondary aluminum smelting and refining
industry.
Following is a summary of the specific items covered in both Parts
II and III, arranged in general compliance with a format proposed by the
EPA:
A. Industry Segments
1. Types of plants in the industry
1-7
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a. Types of firms
size
- level of integration
- number of plants
- number of products
- level of diversification
b. Types of plants
- size
- age
- location
- level of technology
- efficiency
- level of integration (Production)
2. Number of plants and employees in each segment
3. Percent of total industry for each segment
- by number of plants
- by production
- by employment
4. Identification of segments likely to be significantly impacted
B. Financial Profiles
1. For plants in each segment:
- Annual profit before taxes
- Annual cash flow
- Market (salvage) value of assets
- Cost structure
- fixed costs
- variable costs
2. The likely distribution of the above financial parameters
within the industry segments.
3. Constraints on financing additional capital assets for any
of these segments.
4. Price effects;
- Price determination process in the industry
- Likely price changes and secondary effects
C. Impact Analysis
1. Price effects
- Price increases
- Secondary effects
1-8
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2. Financial effects
- Production curtailment
- Capital availability
3. Production effects
- Production curtailment
- Plant closings
Industry growth
4. Employment effects:
- From production curtailment
- From plant closings
From changes in industry growth
5. Resultant community effects;
- Location of plant closings or production
curtailments
- Number and location of impacted communities
- Probability of building new plants in the area
- Probability of dislocated employees being absorbed
in local workforce
- Secondary effects resulting in further unemployment
in impacted areas
D. Limits of the Analysis
1. Accuracy
2. Range of error
3. Critical assumptions - sensitivity to overall conclusions.
4. Questions remaining to be answered
1-9
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PART II - BAUXITE REFINING
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II. BAUXITE REFINING
A. INTRODUCTION
This portion of the study is aimed at supplying the Environmental
Protection Agency with information regarding the economic impact on the
U.S. bauxite refining industry of the costs of pollution abatement require-
ments under the Federal Water Pollution Control Amendments of 1972 for
each of the three standards under consideration:
1. Proposed Best Practicable Technology (B.P.T.) - to be
met by industrial dischargers by 1977.
2. Proposed Best Available Technology (B.A.T.) - to be met
by 1983.
*3. Proposed New Source Performance Standards (N.S.P.S.) -
to be applied to all new facilities (that discharge directly
to navigable waters) constructed after the promulgation of
these guidelines (approximately January 1, 1974).
The primary aluminum industry is comprised of bauxite mining,
bauxite refining or alumina production, and the reduction of alumina
to aluminum. These three stages in production tend to occur in different
physical locations because of raw material and energy supplies and market
locations, and have different technologies and cost functions.
1. Raw Materials
In nature aluminum is invariably combined with other elements. There
are three known hydrated aluminum oxide minerals with fairly well defined
geographic distribution which are generally referred to as bauxites.
Gibbsite, the only naturally occurring form of aluminum trihydrate (A120.J
•3H20), contains 65.4 percent alumina and 34.6 percent water. Boehmite
and diaspore (alpha monohydrate, A^O-j.I^O) each contain 85 percent alumina
and 15 percent water. Diaspore is not used to produce alumina commercially.
Bauxite is classified into Jamaican, Surinam, and European types.
The first contains both trihydrate and monohydrate, the second trihydrate
only, and the third contains all grades but is mostly boehmite (monohydrate)
a. Bauxite reserves
Domestic bauxite reserves are limited (see Table II-l) and U.S. Bayer
plants are almost totally dependent on imported ores, as discussed later.
II-l
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TABLE II-l
Country
United States
Australia
France
Greece
Guinea, Republic of
Guyana
Jamaica
Surinam
Other Free World
Communist Countries
(except Yugoslavia)
World Total
WORLD BAUXITE RESERVES,
(Thousand Long Tons)
Grade
(% Al 0,1
f- jr~
50
50
58
54
54
58
50
58
55
50
1972
Quantity
45,000
4,500,000
60,000
150,000
4,000,000
100,000
800,000
600,000
4,000,000
700,000
Percent
of Total
15,000,000
(1)
100.0
(1)
(1)
Totals may not add due to independent rounding.
SOURCE: Commodity Data Summaries, Bureau of Mines, 1973
II-2
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The location of new bauxite discoveries, both proven reserves and poten-
tial resources, suggest that an increasing amount of the world's bauxite
will be produced in Australia and Africa.
b. Bauxite mining
Approximately 90 percent of total noncommunist world bauxite production
is mined by open-pit methods except in Europe where bauxite mining is
predominantly by underground methods. After mining, the bauxite is generally
crushed, dried, and beneficiated before shipment to an alumina plant.
Aluminum is unique among nonferrous metals industries in that the
mining and beneficiation of the ore generally represents a fairly small
percentage of the total cost of primary metal production. Transportation
costs, however, have had a noticeable effect on the location of alumina
plants since they tend to be 25 to 50 percent of the delivered cost of
bauxite in the United States, although the amount varies with the source
of the bauxite.
In 1971, U.S. production of bauxite was 1,988,000 long tons or only
about 3 percent of total world production of 61,981,000 long tons. Arkansas
produces about 90 percent of total domestic output, with the remainder
being produced by Alabama and Georgia. Alcoa and Reynolds account for
most of the Arkansas production, which is mined entirely in Pulaski and
Saline counties. Table 11-2 shows the domestic mine production of bauxite
over a ten year period.
In 1971, nearly 89 percent of the bauxite used by U.S. Bayer plants
was imported. The two alumina plants in Arkansas consumed mainly domestic
bauxite, whereas, the other seven used imported ore exclusively.
2. Bauxite Refining
The Bayer process is used universally for bauxite refining, with
slight -modifications due to the type of bauxite being processed. In
this process, the bauxite is digested with caustic soda solution under
pressure, giving a solution of sodium aluminate and leaving an oxide of
iron ("red mud"). Reaction (1) shows this step;
A1203 + 2NaOH = 2NaA102 + H20 (1)
The solution of sodium aluminate is agitated with hydrated alumina "seed"
crystals, thus, precipitating about 50 percent of the alumina as hydrated
alumina according to reaction (2):
2NaA102 + 4H20 = A1203.3H20 + 2NaOH (2)
II-3
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TABLE II-2
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
MINE PRODUCTION OF BAUXITE IN THE
Alabama
Quantity
99
47
39
61
78
83
83
88
213
207
(Thousand
& Georgia
% of
Total
7
3
2
4
4
5
5
5
10
10
Long Tons)
UNITED STATES
Arkansas
Quantity
1,270
1,478
1,562
1,593
1,718
1,571
1,582
1,755
1,869
1,781
% of
Total
93
97
98
96
96
95
95
95
90
90
Totals^
1,369
1,525
1,601
1,654
1,796
1,654
1,665
1,843
2,082
1,988
Totals may not add due to independent rounding.
SOURCE: Minerals Yearbook, 1966; Minerals Yearbook Preprint, 1971.
II-4
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The hydrated alumina is then calcined to remove the waters of hydration
resulting in pure alumina.
Bauxite contains various amounts of impurities, chiefly silica, iron
and titanium, intimately associated with the alumina. Metal of suitable
purity cannot be made directly from bauxite because of these contaminants.
The raw ore must be refined to a pure form of alumina before it is reduced
to the metal, since the aluminum industry is based on the use of 99%+
aluminum in the manufacture of the various alloys and products.
Various modifications of the Bayer process are used for the commercial
production of alumina. Several other processes (such as acid leaching)
have been developed for refining bauxite or other aluminum bearing materials
but these have yet to be utilized on a large scale for the production of
alumina.
The primary function of the Bayer process is to separate pure alumina
from the various impurities—silica, iron oxide, titanium oxide, etc.
Several modifications of the Bayer process are used, depending on the
type of raw ore to be processed. The American Bayer process is used on
high-grade bauxites in which the alumina is present chiefly as a tri-
hydrate, i.e., as gibbsite. The Combination process is most practical
for low-grade (high silica) bauxite containing the alumina in the form
of gibbsite. The European process, which is not practiced in the U.S.
is used for ores in which the alumina occurs chiefly as the monohydrate,
boehmite. A modified Bayer process is used for mixed ores which contain
both trihydrate and monohydrate. There are different variations of this
process depending on the characteristics of the particular ore.
a. American Bayer Process
The crushed and dried bauxite is ground to -10 mesh in dry form
in large hammermills or in slurry form in rod mills. Ground lime and
commercial soda ash, which react to form sodium hydroxide, are the other
principal raw materials.
Digestion is a continuous operation. Bauxite and lime are weighed
and placed in a mixer with a small portion of the recycled spent liquor.
The slurry is pumped to the digester. The recycled liquor is reconcen-
trated with addition of fresh caustic soda and pumped through heat ex-
changers to the digester where it is mixed with the bauxite-lime slurry.
The slurry is digested under pressure at about 300°F for approximately
one-half hour which is sufficient to dissolve the alumina and render the
silica insoluble as a sodium aluminum silicate.
The slurry from the digesters is discharged through a series of
heat recovery vessles which drops the pressure to atmospheric pressure.
II-5
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The steam flashed off is used for preheating the digester feed liquor.
The slurry passes through sand traps, which remove the coarse sands,
and then is sent to a clarification step.
The clear liquor from the clarification operation is cooled and
pumped into large precipitation tanks (24 feet in diameter and about 80
feet high). At this point, the strong sodium aluminate solution contains
80 to 100 grams of A1203 and 100 to 125 grams of NaOH per liter. Preci-
pitation is accomplished by adding "seed" hydrated alumina, which has been
classified from previously precipitated material. The solution is allowed
to cool slowly with agitation for a period of 1-1/2 to 2 days. Approxi-
mately 50 percent of the alumina is precipitated as hydrated alumina.
The slurry is pumped off through a classification and washing system
where the hydrated alumina is separated from the spent liquor solution,
which is returned to the digesters for another cycle through the system.
The fine fractions of hydrated alumina are returned as "seed" to
the precipitators. The coarse fraction advances to the calcining operation.
The coarse hydrate from the precipitators is filtered and washed
and then calcined at approximately 2,000°F to remove the moisture and
the chemically combined water of crystallization. This calcined product
is anhydrous aluminum oxide or alumina, which is shipped to the reduction
plants.
Before the spent liquor solution is returned to the digesters for
recycling through the system, evaporation may or may not be required
to maintain the desired concentration and volume of the sodium aluminate
solution. The American Bayer process requires less evaporation than
other modifications of this process.
b. Combination Process
With the advent of World War II, the domestic reserves of high-
grade bauxite were being rapidly depleted. The Combination process
was developed by Alcoa at that time largely as a conservation measure.
This process makes possible the commercial use of large reserves of
high-silica domestic bauxite. Two Combination process plants are now
in operation near Bauxite, Arkansas—one operated by Alcoa and the
other by Reynolds.
This process uses the American Bayer plant plus additional steps
to recover alumina and soda from the Bayer "red mud." These additional
steps are:
Preparation of the mud.—The settled mud slurry from the Bayer
washing thickeners is further thickened by filtration to approximately
50 percent solids, which is kept agitated in large tanks. This mud,
II-6
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along with the proper amounts of limestone and soda ash, is fed into ball
mills and ground to -200 mesh size.
Sintering.—The mud mixture from the ball mills is pumped into surge
tanks from which it is fed into large rotary kilns. The free water is
evaporated and the mixture is sintered at approximately 2,200°F. The
reactions during sintering form dicalcium silicate and sodium aluminate.
Leaching the sinter.—The product from the sintering operation is
mixed with water and ground in ball mills where the sodium aluminate
goes into solution leaving an insoluble residue of impurities called
"brown mud." The slurry is then filtered and washed and the mud is
discarded in the mud disposal lake. Sodium aluminate filtrate from the
filters is pumped back into the Bayer circuit.
Evaporation.—The use of low-grade bauxites produces large amounts
of red mud which require a corresponding large amount of water for washing.
Considerable additional water is used in leaching the sinter. Thus,
this process involves considerable evaporation to maintain the proper
liquor concentrations in the Bayer system. This evaporation load and
the additional operations in processing the mud increase the power re-
quirements of the Combination process.
c. European Bayer Process
The European Bayer process was developed to process the European
bauxites in which the alumina occurs chiefly as the monohydrate, boehmite.
The operating steps in the European process are similar to those of the
American Bayer. The European process uses a higher digestion temperature,
longer digestion periods, and much higher caustic soda concentration.
The digester solution contains approximately 350 grams/liter of NaOK,
which is roughly three times the concentration used in the American practice.
At these concentrations the caustic makeup cannot be generated from
lime and soda ash in the digester; caustic soda prepared in an outside
operation is used.
The strong sodium aluminate solution from the digester must be
diluted to about one-third its concentration before going through the
clarification and precipitation steps. This requires a large amount
of evaporation to restore the concentration needed for digestion.
Some Caribbean bauxite deposits contain the alumina chiefly in
the form of gibbsite, but there are large tonnage deposits in which
the alumina occurs as a mixture of gibbsite and boehmite. Alumina can
be extracted from these bauxites either by using the European type process
or by a modification of the American Bayer process, which is more economical.
II-7
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B. INDUSTRY SEGMENTS
1. Types of Firms
Until 1940 the Aluminum Company of America (Alcoa) was the only
primary aluminum producer and bauxite refiner in the United States. The
domestic bauxite refining industry presently consists of only five large
corporations, all of which are fully integrated from bauxite mining through
to, and including, fabrication of aluminum products. These companies,
their dates of entry into alumina production, and their respective capa-
cities for domestically produced alumina are shown in Table II-3. Of
these, Alcoa, Kaiser, and Reynolds are 100 percent self-owned, Ormet
is owned 50 percent by Olin Corporation and 50 percent by Revere Copper
and Brass, Inc., while Martin Marietta Aluminum, Inc. is owned 82.7 per-
cent by Martin Marietta Corporation.
There are nine bauxite refining plants in the United States. These
are distributed fairly equally among the five large corporations (see
Table II-4). Seven of the plants produce alumina primarily for the
eventual production of aluminum metal. The alumina produced at each plant
is consumed by the parent company for that specific purpose.
The other two plants, both located in Arkansas (see Table II-4),
produce a variety of products for industries other than aluminum metal
production. These two plants process primarily low-grade Arkansas bauxite
using the Combination process as described earlier. This process utilizes
a sintering step which results in a very pure, low-organic product. This
alumina is more pure than that needed for aluminum production and is also,
from first approximation, a higher cost product than alumina produced by
the American and Modified Bayer processes and, therefore, may not be
competitive as a raw material for the aluminum reduction industry.
Products from these two plants are marketed world-wide for numerous
applications in such areas as the chemical industry, refractories,
and cements.
Of the five companies involved in domestic alumina production, Alcoa
and Reynolds can be considered as being involved solely in the aluminum
industry. The other three companies are either diversified or are owned
by diversified companies. Kaiser is perhaps the most diversified of the
five, with about 80 percent of its sales in aluminum and substantial in-
terests in refractories, chemicals, fertilizers, and nickel. A portion
of Martin Marietta's aluminum volume is in non-aluminum products such
as titanium and special metals. The parent company, Martin Marietta
Corporation, is a largely diversified conglomerate with interests in
numerous areas including chemicals, metals, and construction. Ormet is
not itself diversified but is owned by two well diversified companies;
II-8
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TABLE I1-3
BAUXITE REFINING COMPANIES
IN THE UNITED STATES
Company
Date of Entry
1888
Aluminum Company of America
Kaiser Aluminum & Chemical
Corp. 1942
Martin Marietta Aluminum, Inc. 1967
Ormet Corporation 1958
Reynolds Metals Company 1942
Total
Alumina Capacity, 1973
(Short Tons/Year)
2,750,000
1,935,000
400,000
618,000
2,300,000
8,003,000
SOURCE: ADL estimates.
II-9
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TABLE II-4
BAUXITE REFINING PLANTS IN
THE UNITED STATES. 1972
Company and Plant
Aluminum Company of America
(Alcoa)
Bauxite, Ark.
Mobile, Ala.
Point Comfort, Tex.
Totals
Alumina Capacity
(Annual Short Tons)
375,000
1,025,000
1,350.000
Kaiser Aluminum & Chemical Corp.
Baton Rouge, La.
Gramercy, La.
Totals
Martin Marietta Aluminum, Inc.
St. Croix, V.I.
Ormet Corporation
Burnside, La.
Reynolds Metals Company
Corpus Christi, Tex.
Hurricane Creek, Ark.
Totals
Grand Totals
2,750,000
1,040,000
895.000
1,935,000
400,000
618,000
Date
Built
1951-52
1937
1957-58
1941-42
1959
1966
1957
Employment
1,375
650
650
2,675
720
500
1220
430
430
1,460,000
840,000
2,300,000
8,003,000
1952-54
1941
900
1,000
1,900
6,655
SOURCE: ADL estimates.
11-10
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Olin Mathieson Chemical Corporation and Revere Copper and Brass, Inc.
Olin's primary interests are in the chemical industry, while Revere is
one of the largest U.S. fabricators of copper, brass, and aluminum mill
products. More specific information on these companies is given in the
financial discussion (Section C).
2. Types of Plants
As mentioned earlier, there are only nine bauxite refining plants
in the United States. This includes one located in the Virgin Islands.
The other plants are located in Alabama, Arkansas, Louisiana, and Texas
(see Table II-4).
All the plants in the U.S. have been built within the last thirty-
five years. The facilities in Mobile, Baton Rouge, and Hurricane Creek
date back to World War II. Those at Bauxite and Corpus Christ! were
constructed in the early 1950's and the plants at Point Comfort and
Gramercy in the late 1950's. Martin Marietta's plant in the Virgin
Islands was completed in 1967, and Ormet's plant in Burnside, La.,
started production in 1958. The capacities of some of the plants have
been expanded over time, so not all the equipment at the plants is as
old as the original construction dates would indicate. Presented here
will be a brief description of each plant. Figures II-l through II-5
present the alumina production capacities for each plant from the year
of construction to the present.
a. Aluminum Company of America
Bauxite, Arkansas
This plant was built in 1951-52. Plant facilities are designed to
use the Combination Bayer process to refine domestic bauxite supplied
by nearby mines. As can be seen from Figure II-l, capacity has remained
fairly constant. This phenomenon is due to the fact that domestic
supplies of bauxite are limited and bauxite production has remained
fairly constant over this time period.
The operations at this plant are very complicated. About 85 percent
of its output is marketed throughout the world for various uses other
than the production of aluminum metal.
Mobile, Alabama
This is the oldest operating plant in the U.S., constructed in 1938,
and until 1967 was also the largest. Its growth was substantial in the mid-
1950 rs, but has not expanded since then. The plant uses the Bayer process
and operates on Surinam ore exclusively.
11-11
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Point Comfort, /'
Texas .'
Mobile,
Alabama
Bauxite,
Arkansas
I
1940
1945
1950
1955
Year
1960
1965
1970
1973
FIGURE 11-1 ALUMINUM COMPANY OF AMERICA - GROWTH HISTORY OF DOMESTIC
BAYER PLANTS
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Baton Rouge, La.
I ' L
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1945
1950
1955
Year
1960
1965
1970 1973
FIGURE 11-2 KAISER ALUMINUM AND CHEMICAL CORPORATION-GROWTH HISTORY
OF DOMESTIC BAYER PLANTS
-------
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Capacity (thousand short tons per year)
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I
I I I I I I I I I I I I I I I I
I I I I I I I L
1940
1945
1950
1955
Year
1960
1965
1970 1973
FIGURE II-5 REYNOLDS METALS CO. - GROWTH HISTORY OF DOMESTIC
BAYER PLANTS
-------
Point Comfort, Texas
This is Alcoa's newest bauxite refining plant and has experienced
considerable growth since its construction. This is due to the facts that
the plant obtains bauxite supplies from Alcoa's mines in Surinam, Jamaica,
and the Dominican Republic and the aluminum plant is located near a company-
owned primary reduction plant in Texas and is on the Gulf Coast, thus, mini-
mizing transportation costs for both alumina and bauxite. This plant is
using a slightly modified Bayer process since it is treating Jamaican ore
which contains both gibbsite and boehmite.
b. Kaiser Aluminum & Chemical Corporation
Baton Rouge, Louisiana
This plant was built for the Government during World War II to
produce 500,000 tons annually by the Modified Bayer process. Sintering
facilities for "red mud" processing were also installed there. The plant
was leased by Kaiser in 1946 and purchased in 1949 subject to a modified
National Security Clause. Equipment to use the modified Bayer process
has been installed. The plant operates primarily on Jamaican ore from
company-owned deposits. The plant has grown gradually since its con-
struction.
Cramercy, Louisiana
Gramercy is a fairly new plant, beginning operation in 1959. It has
experienced more rapid growth in recent years than has the Baton Rouge
plant. Like the Baton Rouge plant, this plant operates on Jamaican ore
and uses the Modified Bayer process also.
c. Martin Marietta Aluminum, Inc.
St. Croix, Virgin Islands
Martin Marietta's plant which was completed in 1967 is the newest
bauxite plant in the U.S. or its possessions. To the best of our knowledge,
this plant operates on purchased bauxite from Guyana and Australia. It
uses the Modified Bayer process. Martin Marietta is participating in a
joint venture for a bauxite mine in West Guinea.
d. Ormet Corporation
Burnside, Louisiana
Ormet's plant is another young bauxite plant. Its capacity has grown
steadily since 1964. Ormet does not have its own bauxite supply and, there-
11-17
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fore, buys Surinam bauxite. The method used here is the conventional
Bayer process.
e. Reynolds Metals Company
Corpus Christi, Texas
This plant, built during 1952-54, adjoins the company's San Patricio
orimary reduction nlant. Originallv designed to ooerate on straieht
Jamaican bauxite, it employs a modification of the Bayer process. It,
like Alcoa's Point Comfort, Texas plant, has also experienced a very
rapid growth and is now the largest bauxite refining plant in the U.S.
The same reasons apply here as at Point Comfort, that is, the bauxite
sources are company-owned mines in Jamaica and Haiti and the alumina
plant is located near a company-owned primary reduction plant in Texas
and is on the Gulf Coast.
Hurricane Creek, Arkansas
This plant was built for the Government and operated by Alcoa during
World War II. Production began in July 1942. After operating the facili-
ties under lease for three years, Reynolds purchased the plant in 1949,
subject to a modified National Security Clause. The plant employs the
Combination process on locally-mined ore. It uses a small amount of
imported bauxite from company-owned operations in Guyana to bring the
silica content of the overall ore within practicable processing tolerances.
Similar to Alcoa's Bauxite, Arkansas plant, it has experienced very little
growth due to its heavy reliance on limited domestic reserves. Also,
like Alcoa's plant, it produces only about 15 percent of its alumina for
eventual use in the production of aluminum metal. It has over 300 customers
and produces more than 30 different products.
Each alumina plant, in our opinion, is utilizing the best known tech-
nology available for the particular ore it is processing. Efficiencies
range from 70 to 90 percent recovery of the alumina from the bauxite
depending on the difficulty of the ore.
Plant sizes in terms of both employment and annual production of alumina
are shown in Table II-4. All U.S. plants are about the same size. One
reason for this is that the minimum economic size for an alumina plant today
appears to be about 330,000 tons per year (1,000 tons per day) of alumina,
assuming 90 percent utilization. Another reason is that once a plant reaches
about 500,000 tons per year, increases in economy with size are not as
great since plants larger than this usually consist of two parallel
lines under the same roof. In such cases, some economies of scale would
be experienced because of such things as shared infrastructure, townsite,
dock facilities, overhead, etc. But, requirements per ton of alumina
11-18
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for such things as raw materials, power, and labor begin to level out.
3. Segmentation
Because of the concentrated nature of the domestic bauxite refining
industry, we plan to assess the economic impact of water pollution guide-
lines on a plant by plant basis. This approach allows for a more spe<. if to
analysis of each plant's possible problems rather than a generalized
analysis of a particular segiuent.
A significant question arises in the segmentation of an industry:
what criteria should be used? One approach which seems right to one
person may not sound best to another. Also, a plant or firm may faJl
into a "gray" area where it is difficult to tell which segment it. ftts
into.
Fortunately, the domestic bauxite refining industry consists of only
five companies and nine plants which permits the individual analysis o)
each plant and, therefore, by-passes potential problems presented by tUe
segmentation scheme. It should be noted that this industry is very
unique in this respect and that this particular method of analysis may
be very difficult and time consuming in most other major industries.
C. FINANCIAL PROFILES*
As discussed earlier, we are concerned with the performance of five
companies. These are Alcoa, Kaiser, Reynolds, Martin Marietta Aluminum,
and Ormet. The first three are among the four largest aluminum producers
in the world and are known as the "Big 3" in the U.S. Martin Marietta
Aluminum, formerly Harvey Aluminum, is part of the large conglomerate
firm Martin Marietta Corporation. Ormet is owned 50% by Olin Corporation
and 50% by Revere Copper and Brass, Inc. The financial profiles of
these companies will be presented herein.
In respect to Ormet Corporation, the discussion of Revere will be
emphasized since Olin has recently announced its intention to divest
itself of its interests in Ormet. We are, therefore, presently studying
the financial arrangements related to Olin's announced intention to
divest itself of its interests in Ormet and in view of the obligations
*Information contained herein was obtained from the individual company's
10-K report filed with the SEC in March, 1973.
11-19
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of Olin in respect to Ormet and Revere, as presented later. For the
moment, we associate Ormet's operations and alumina facility primarily
with Revere Copper and Brass and have grouped it under Revere because
of this transient ownership situation.
Selected financial data and highlights of the operations of the
"Big 3" are presented in Tables II-5 through II-7. Details of current
operations will be presented subsequently.
1. Aluminum Company of America
Alcoa is the largest aluminum company in the world. Alcoa has
probably the firmest raw material base, with large reserves in Jamaica,
Surinam, Australia, and (still under development) Guinea, West Africa.
The company also has limited U.S. reserves, but most of its current
raw material requirements are met by importing bauxite to supply domestic
alumina plants. Over 80% of the company's smelter capacity is located
in the United States.
Bauxite and Alumina
The company mines bauxite from properties which it owns in Arkansas,
and from reserves held under mining rights in Surinam (expire 2033), the
Dominican Republic (expire 2007, subject to renewal under conditions
contained in the concession agreement) and Jamaica (expire 1982 and 1993,
subject to renewals under conditions prescribed in the mining laws of
Jamaica). The company estimates that the bauxite contained in such
properties and reserves is sufficient in the aggregate to supply its
requirements for bauxite, at current consumption rates, for a period
of at least 40 years.
In Western Australia, the company has certain mineral rights and
also has options to acquire additional mineral rights. The present
mineral rights of the company currently supply bauxite sufficient to
produce 7% of the alumina required to operate the company's present domestic
primary aluminum capacity. The company can increase this supply to 42%
of such requirement by exercising, in five increments, such options to
acquire additional mineral rights. However, the exercise of any such
option after December 30, 1986, is subject to the approval of the govern-
ment of Western Australia. All such mineral rights are held subject to
a mineral lease which expires in 1982 but may be extended, at the option
of a 51% owned subsidiary of the company, to 2045. All bauxite from such
mineral rights is to be refined at an alumina plant or plants in Australia
owned or to be owned by such sibsidiary. The right to refine bauxite from
the present mineral rights expires in 1988 but may be extended by the
11-20
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TABLE II-5
REFERENCE DATA ON
MAJOR PRIMARY ALUMINUM PRODUCERS
Alcoa Kaiser Reynolds
Percent Change in Earnings
Due to Aluminum price change high med. - high high
Reported Income Tax Rate
1971 , 32% 31% nil
1970 40% 31% 32%
Estimated Breakdown of Revenue
Primary 10 - 15% 5-10% 23 - 27%
Fabrication 65 - 70% 60 - 70% 62 - 66%
Other Sales 10 - 15% 5 - 10% 10 - 12%
All Other, n.e.c. 5% 23 - 29% -
100% 100% 100%
NOTE: While reasonable care was taken in compiling this data and presenting
it in as consistent a fashion as is possible, we cannot guarantee
absolute comparability from one company to the next, due to differences
in the nature of earnings, and differences in their accounting for cer-
tain balance sheet and income statement items. To the best of our
knowledge the above data present an accurate and meaningful basis for
selective comparisons.
The information presented above has been obtained from company annual
reports and SEC filings, statistical services, financial manuals, and
other sources believed to be reliable, but its accuracy and complete-
ness are not guaranteed.
11-21
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TABLE II-6
FINANCIAL PERFORMANCE DATA ON
MAJOR PRIMARY ALUMINUM PRODUCERS
Company
Net Sales
for the Year
Operating
Income before
Depreciation
Net After-Tax
Earnings (before
Extraordinary
Items)
Capital
Expenditures
Operating
Ratio:
Op. Income ^
Sales
Net After-Tax
Return on
Stockholder's
Equity
Ratio of
Capital Expenditures
to Gross Plant
at Year End
$ million
-Percent-
Alcoa
1971
1970
1969
1968
Reynolds
1971
1970
1969
1968
Kaiser
1971
1970
1969
1968
1,441.2
1,522.4
1,545.2
1,352.8
1,093.2
1,035.2
1,012.7
843.8
904.5
880.9
925.8
850.1
251.2
323.5
330.8
308.7
114.6
171.3
173.3
121.5
104.2
122.3
148.9
138.2
55.30
114.30
122.40
104.70
5.89
47.46
57.07
31.09
27.00
50.80
60.20
52.00
199.4
284.9
247.3
177.2
79.7
112.7
128.6
127.4
107.4
121.6
158.1
132.8
av. 20.7%
av. 8.
av. 8.6%
av. 14.8%
Includes
Avg. of
$37.6/yr.
Investments
av. 14.5%
av. 7.
av. 7.1%
av. 9.0%
av. 9.7%
NOTE: While reasonable care was taken in compiling this data and presenting it in as consistent a fashion as is possible,
we cannot guarantee absolute comparibility from one company to the next, due to differences in the nature of earn-
ings, and differences in their accounting for certain balance sheet and income statement items. To the best of
our knowledge the above data present an accurate and meaningful basis for selective comparisons.
The information presented above has been obtained from company annual reports and SEC filings, statistical services,
financial manuals, and other sources believed to be reliable, but its accuracy and completeness are not guaranteed.
-------
TABLE I1-7
SELECTED FINANCIAL DATA: MAJOR U.S.
1971
Sales (in millions of dollars) 1
Pre-Tax Profit
(in millions of dollars)
Net Income
(in millions of dollars)
Cash Flow from Operations and
Holdings (in millions of dollars)
Increase (Decrease) in debt
Dividends Paid
Current Ratio: Assets/Liabilities
Net Working Capital
Capital Expenditures
Long-Term Debt, year end
Equity, year end 1
Alcoa
,462.1a
76.7
52.0
187.9
71.5
41.2
3.2
520.0
199.4
954.0
,268.6
ALUMINUM COMPANIES
Kaiser
Aluminum
904.5
39.2
27.0
69.0
85.9
1.6
189.0
589.0
631.6
Reynolds
l,106.5a
5.5
5.9b
72.9
70.3
18.0
3.2
408.0
79.7
878. Oc
699.1
43.0
48.1
Debt f (debt and equity)
Percent based on book values
Scheduled Debt Repayment
(1972 payment excluded from
long-term debt at year end 1971)
1972
1973
1974
1975
1976
Long-Term Financing
(in millions of dollars, 1971)
Employment, year end
a. Includes other revenues and/or income, as reported.
b. $47.5 for 1970.
c. Includes $125.0 of convertible debentures.
d. Estimated.
55.5
44,
21.9
40.3
28.0
42.0
36.3
203.9
064
35.9
31.7
31.3
33.1
53.1
123.1
24,500d
50.4
64.1
52.7
66.7
92.9
122.0
35,900
11-23
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TABLE II-7 Cont'd.
NOTE: While reasonable care was taken in compiling this data and presenting
it in as consistent a fashion as is possible, we cannot guarantee
absolute comparability from one company to the next, due to differences
in the nature of earnings, and differences in their accounting for cer-
tain balance sheet and income statement items. To the best of our
knowledge the above data present an accurate and meaningful basis for
selective comparison.
The information presented above has been obtained from company annual
reports and SEC filings, statistical services, financial manuals, and
other sources believed to be reliable, but its accuracy and complete-
ness are not guaranteed.
11-24
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company to 2008. Upon exercise of any option to acquire additional mineral
rights, the right to refine the related bauxite has a basic 20-year term,
which may be extended by the company for an additional 20 years.
Alcoa also has alumina plants in Jamaica, Surinam, and Australia.
It has a substantial planned surplus of alumina capacity over its own
needs, which has allowed it to sign a number of long-term supply contracts.
Alcoa has a 27% interest in Halco (Mining), Inc., the company formed
as a consortium to develop the extensive Boke-bauxite deposits in Guinea.
(Martin Marietta has a 20% participation—as will be discussed.) By 1980,
this will be supplying about one-third of Alcoa's demand. Alcoa is also
constructing a $125 million alumina plant in Costa Rica, which may supply
15% of its needs at that time.
Primary Aluminum
Most of the bauxite and alumina produced by Alcoa is used for further
processing by the company into aluminum. Most of the primary aluminum
produced is further processed into fabricated products which generally
are sold to producers of consumer and industrial products in various
industries. The total production of primary aluminum by the company during
1972, including all primary aluminum produced by nonconsolidated sub-
sidiaries and affiliates, constituted approximately 15% of the free
world's estimated primary aluminum production.
Primary aluminum is produced from alumina at smelting plants at
Alcoa, Tennessee; Badin, North Carolina; Evansville, Indiana; Massena,
New York; Point Comfort, Texas; Rockdale, Texas; Vancouver, Washington;
Wenatchee, Washington; and Surinam. The company's primary aluminum
capacity at December 31, 1972, including one-half of the capacity of
two smelters in Norway in which the company holds 50% interests, was
1,725,500 short tons and its primary aluminum production during 1972
was 1,392,000 short tons. Capacity is based on normal operating
conditions and does not represent maximum possible production. Primary
aluminum shipments by Alcoa during 1972 were 388,000 short tons. Fabri-
cated aluminum products are produced at 26 domestic and 3 foreign plants
owned by the company. The annual capacity of fabricating facilities is
dependent upon the product mix. Shipments by the company of fabricated
aluminum products were 1,178,000 short tons in 1972.
In response to the effects of over-capacity in the world aluminum
industry, Alcoa has stated it reduced primary aluminum production so that
in 1972 the company's average operating rate was 87.1% of the capacity
of its domestic smelters. In the latter part of 1972 and early 1973,
as demand increased sharply, certain primary aluminum production units
were started up. The company's domestic primary aluminum operating rate
on February 28, 1973 was 93.5%.
11-25
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Alcoa Smelting Process
Alcoa has applied for patents on the "Alcoa Smelting Process," a new
electrolytic method of producing primary aluminum from aluminum chloride,
made from alumina, which it expects will reduce by as much as 30% the
electricity required by the most efficient units of the Hall process
(presently used worldwide in the production of primary aluminum) and
result in lower operating costs. The new process, which involves electro-
lysis in a completely enclosed system, is expected to be essentially free
of undesirable emissions and to afford a superior employee working environ-
ment. Moreover, the new process is reportedly more tolerant of power
interruptions than the Hall process and will permit plants to be located
on smaller sites, with greater location flexibility. The new process does
not involve the need for fluoride chemicals, as does the Hall process,
arid thereby eliminates the expenses of containing fluoride emissions.
The company has reportedly spent $25 million in the development of the
new process, which has been tested in a full scale developmental unit.
The first unit of an Alcoa Smelting Process plant, having an initial
capacity of 15,000 tons per year of primary aluminum and an ultimate
design capacity of 30,000 tons, is expected to be completed in 1975.
Completion of the entire plant, presently conceived as a 300,000-ton
facility, is contingent upon construction and operating experience with
the first unit. The company does not expect that the new process will
result in any near-term obsolescense of its existing facilities for
smelting aluminum.
Other Business
In addition to being the largest integrated producer of primary
aluminum and fabricated aluminum products, Alcoa's operations also include
the sale of engineering and construction services, shipping and the
fabrication of products from other metals.
Under the management of Alcoa Properties, Inc.—a wholly owned non-
consolidated subsidiary—the company acquires and develops land, develops
and operates real estate properties, sells developed land and properties
and constructs and sells residential properties, including housing for
low and middle income families. Such operations in real estate, housing
and land development are closely coordinated with the company's opera-
tions in the manufacture and marketing of building products, components
and systems combining a variety of materials.' The latter operations are
conducted by a division, Alcoa Building Industries.
A recent important policy change is Alcoa's willingness to sell
technical assistance (although the first sale was to Anaconda, hardly
a newcomer to the industry). Alcoa has decided that technical assistance
11-26
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is now available fron, so many sources that it might as well take advantage
of the profit opportunity represented by its own considerable expertise.
Consolidated Income
Table II-8 presents Alcoa's consolidated income statements for the
last five years. All oa reported that income from operations for 1971
was adversely affected by lower shipments, price weaknesses, increased
depreciation and interest expense, and June 1, 1971, labor contracts
resulting in higher operating costs. During 1972, shipments increased
but the other factors continued to affect adversely the company's income
from operations.
Net income for 1972 increased substantially over that for 1971,
approximately $29 million of such increase resulting from the sale of
the company's interest in three real estate developments. There were no
substantial real estate development sales during 1968 or 1971, but two
large properties were sold during each of the years 1969 and 1970.
Alcoa's cash flow from operations, including the effects of deferred
credits and reserves and equity in non-consolidated entities, was $238MM
in 1972, compared to $188MM for 1971.
Assets
Alcoa's consolidated balance sheet as of December 31, 1972, showed
total assets of $2.704 billion. Current assets were $804 million, current
liabilities $240 million, providing $564 million in net working capital.
Total properties, plant, and equipment at cost was $3.033 billion, almost
twice 1972 sales; net property, plant and equipment, after accumulated
depreciation depletion and amortization, was $1.495 billion.
Long-Term Debt
Table II-9 summarizes Alcoa's outstanding long-term debt at December
31, 1972. Long-term debt due after one year was $904 million. Deferred
items were $221 million including $197 million in deferred tax reserves.
Equity consisted of $66 million in preferred stock and $1,119 million in
common stock and retained earnings.
Alcoa is somewhat unique in that while it has a significant amount
of long-term debt, it has a relatively low debt-equity ratio among the
aluminum companies. It appears to be consistent with this financial
position that its debt is in the form of debentures and notes instead
of first mortgage bonds.
11-27
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TABLE II-8
00
Income:
Sales & Operating Revenues
Interest, principally from entities
not consolidated
Other Income
Costs & Expenses:
Cost of goods sold & operating expenses,
not including depreciation & depletion
Selling, gen'l admin. & other expenses
Provision for depreciation & depletion
Interest Expense
Taxes, not including social security &
U.S. and foreign taxes on income
& foreign taxes on income
& foreign taxes on income:
Income before U.S.
Provision for U.S.
U.S. :
Current
Future
Foreign:
Current
Future
Income from Operations
Equity in earnings (losses) of entities not
consolidated:
Real Estate Developments
Other
Income before Extraordinary Items
Extraordinary Items
Net Income
NSOLIDATED SUBSIDIARIES
F CONSOLIDATED INCOME
1968
1352.8
8.6
8.9
1370.3
882.3
135.3
113.0
32.8
26.5
1189.9
180.4
52.4
7.7
15.8
4.2
80.1
100.3
(1.3)
5.7
4.4
104.7
—
104.7
1969
1545.2
10.3
13.3
1568.8
1039.5
144.9
121.9
36.9
30.0
1373.2
195.6
49.8
13.3
22.0
2.8
87.9
107.7
6.0
8.6
14.6
122.4
—
122.4
1970
-$Millions-
1522.4
13.1
7.3
1542.8
1022.5
148.3
127.8
48.6
28.1
1375.3
167.4
27.3
15.1
24.0
.3
66.7
100.7
4.4
9.2
13.6
114.3
(18.8)
95.5
1971
1441.2
12.7
8.2
1462.1
1011.7
149.2
137.5
57.8
29.2
1385.4
76.7
(17.0)
15.2
27.2
(.7)
24.7
52.0
(5.2)
8.5
3.3
55.3
—
55.3
1972
1753.0
12.1
13.8
1778.9
1269.8
154.9
150.9
61.4
30.4
1667.4
111.5
7.7
8.2
27.7
(1.0)
42.6
68.9
19.9
14.0
33.9
102.8
—
102.8
SOURCE: Aluminum Company of America, Form 10-K annual report.
-------
TABLE II-9
1973
Sinking fund debentures:
3% due 1979
4 1/4% due in 1982
3 7/8% due in 1983
6% due 1992
9% due 1995
7.45% due 1996
Notes:
3% due 1973 $12,000
4 3/8% due 1988 1,243
4.65% due 1989 2,699
6% due 1977-89 2,205
5 1/4% Convertible Subordi-
nated debentures due 1991
6 1/2% bonds due 1986...
Other 9.276
ALUMINUM COMPANY OF AMERICA
LONG-TERM OBLIGATIONS
(December 31. 1972)
(In thousands of dollars)
Due
1974
$ 1,471
3,032
1975
$ 4,071
5,200
5,200
7,000
1976
$ 4,150
5,200
5,200
7,000
3,250
5,200
2,247
3,250
5,200
2,296
3.930 10,014
3,250
5,200
2,352
4.061
Less amount due within one year included in current liabilities,
Noncurrent long-term debt
1977
$ 4,150
5,200
5,200
7,000
3,250
5,200
2,416
6,250
801
$27.423 $19.130 $42,231 $36,413 $39.467
1978-96
$ 8,700
26,200
31,400
104,000
150,000
150,000
35,821
82,608
35,311
118,750
20,048
3.642
$766,480
Total
long-term
debt
$ 21,071
43,271
50,032
125,000
150,000
150,000
12,000
50,064
106,107
46,827
125,000
20,048
31.724
$931jl44
27.423
$903,721
-------
2. Kajser Aluminum & Chemical Corporation
Kaiser Aluminum & Chemical Corporation is the third largest domestic
producer of primary aluminum and fabricated aluminum products. Its
aluminum operations include the mining of bauxite, the production of alumina
from bauxite, the reduction of alumina to aluminum and the fabrication
of aluminum and aluminum alloys into a variety of products. Kaiser Aluminum
also has substantial interests in enterprises engaged in various aspects
of the aluminum business in Africa, Asia, Australia, Canada, Europe,
Jamaica and South America.
In addition, it produces agricultural chemicals, certain industrial
chemicals, strontium products and a wide range of refractories materials,
mines and sells iron ore, engages in real estate activities, engages in
international commodity trading, and has interests in nickel and shipping
activities. The company is more diversified than the other major aluminum
companies. It in turn is controlled by the diversified Kaiser Industries
Corporation, which also controls Kaiser Steel and Kaiser Cement. Financial
data on Kaiser's business are presented in Table 11-10.
Bauxite and Alumina
Kaiser Aluminum mines bauxite from its reserves on the north coast
of Jamaica. The Jamaica bauxite is refined into alumina at Kaiser
Aluminum's two alumina plants located at Baton Rouge and Gramercy (near
New Orleans), Louisiana. The Jamaica reserves are estimated to be sufficient
for at least 40 years' capacity operations of the Louisiana alumina plants.
Kaiser depends on Jamaica and Australia for its bauxite, while its
alumina plants are located in the United States, Jamaica, and Australia,
and a new plant is projected for France. The domestic alumina plants
feed most of the company's domestic smelter requirements; thus, raw
material imports are primarily in the form of bauxite. The company's
greatest bauxite strength lies in Comalco, its Australian operation
which is 45% owned by Conzinc Rio Tinto of Australia and 10% by the
public. Kaiser has adequate alumina capacity to cover the needs of
its smelters.
Primary Aluminum
Kaiser Aluminum owns and operates four domestic aluminum reduction
plants with an aggregate rated capacity of 710,000 annual tons of primary
aluminum. These plants, at which alumina is reduced to primary aluminum,
are located at Chalmette (near New Orleans), Louisiana; Ravenswood, West
Virginia; and Mead (near Spokane) and Tacoma, Washington. As of
December 31, 1972, these plants were operating at approximately 93% of
rated capacity as compared with an operating rate of about 82% in early
11-30
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TABLE 11-10
KAISER ALUMINUM AND CHEMICAL CORP.
FINANCIAL DATA
SUMMARY: NET SALES & INCOME (1)
1972 1971
(Expressed in Thousands)
NET SALES
Aluminum $714,423 $663,677
Agricultural Chemicals 90,240 82,860
Refractories 72,057 62,497
Industrial Chemicals 52,591 48,647
Trading 36,410 27,524
Nickel 16,006 4,181
Strontium 588 284
Other 8.514 14,861
Total $990.829 $904.531
INCOME BEFORE INCOME TAXES
AND INTEREST EXPENSE (2)
Aluminum $ 47,518 $ 77,636
Agricultural Chemicals 1,306 (25)
Refractories 11,157 5,750
Industrial Chemicals 9,336 2,998
Trading 5,825 4,625
Nickel (5,125) (827)
Strontium (3,223) (98)
Real Estate 5,322 4,213
Shipping (1,760) (1,073)
Other (1,953) (13,264) (3)
Total $ 68,403 $ 79,935
INCOME TAXES
AND INTEREST EXPENSE 53.340 52.934
NET INCOME BEFORE
EXTRAORDINARY ITEMS $ 15.063 $ 27.001
(1) Aluminum, Industrial Chemicals, and Trading are somewhat
interdependent, sharing certain facilities and transferring
significant quantities of products from one to the other.
(2) Corporate overhead has been allocated on the basis of assets
and net sales.
(3) Includes $8,917 loss from modular building operation.
11-31
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1972, and 88% in early 1971. During 1971 and 1972, Kaiser Aluminum's
production of primary aluminum from these four plants was approximately
14.5% and 16%, respectively, of the primary aluminum output in the United
States. One of Kaiser Aluminum's two 26,000 annual ton potlines not
operating at year-end 1972 at its Mead, Washington, plant was activated
on March 1, 1973, and the last inactive line is scheduled to be activated
in early May, at which time Kaiser Aluminum will be operating its primary
aluminum production facilities at 100% of rated domestic capacity.
Kaiser Aluminum fabricates a wide variety of aluminum products at
fabricating plants located near its Ravenswood and Mead aluminum plants
and in principal marketing areas of the United States. Most of the
fabricating plants are owned and the remainder are held under long-term
leases. Kaiser Aluminum also leases facilities at various locations in
the United States for processing and distributing specialized aluminum
products. In 1972 and 1971, fabricated products accounted for approximately
68% of the tonnage sales volume of the aluminum business of Kaiser Aluminum.
Long-Term Debt
All of the major United States plants owned by Kaiser Aluminum and
the capital stock of the subsidiary which owns Kaiser Aluminum's Jamaica
north coast bauxite facilities are subject to the lien of the Indenture
of Mortgage and Deed of Trust securing Kaiser Aluminum's First Mortgage
Bonds.
The First Mortgage Bond Indenture, as supplemented, restricts borrow-
ings, acquisition of the Corporation's stock, investments, and payment
of cash dividends. At December 31, 1972 and 1971, consolidated retained
earnings pf $27 million and $24 million, respectively, were not restrict-
ed as to the payment of cash dividends on preferred, preference, and
common stocks under the most restrictive provision of the indenture.
Substantially all of the Corporation's domestic plant properties now
owned or to be acquired are subject to the first mortgage bond lien,
and the capital stock of Kaiser Bauxite Company (wholly-owned subsidiary)
is pledged as collateral for the bonds.
A summary of Kaiser Aluminum's long-term obligations at December 31,
1972 are shown in Table 11-11.
3. Martin Marietta Aluminum, Inc. (MMA)
Martin Marietta Aluminum, Inc. , formerly Harvey Aluminum, is an
82.7%-owned subsidiary of Martin Marietta Corporation. MMA's operations
shown in the perspective of Martin Marietta Corporation are presented in
Table 11-12.
11-32
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TABLE 11-11
KAISER ALUMINUM & CHEMICAL CORPORATION
LONG-TERM OBLIGATIONS
(December 31. 1972)
(In thousands of dollars)
Due
1973
1974
1975
1976
1977
1978-96
First Mortgage Bonds:
3.625% due 1976 $ 2,425 $ 2,425 $ 2,425 $22,850 $
Tot al
3u,J25
4.93% due 1976 1,625 1,625 1,625 1,375 6,250
3.75% due 1976 2,500 2,500 2,500 2,500 10,000
4.25% due 1981 4,800 4,800 4,800 4,800 4,800 33,600 57,600
5.56% due 1981 1,200 1,200 1,200 1,200 1,200 5,600 11,600
5.50% due 1987 1,600 1,600 1,600 1,600 1,600 26,000 34,000
5.375% due 1991 1,920 1,920 1,920 1,920 1,920 38,880 48,480
6.875% due 1993 -- 3,000 3,000 3,000 3,000 48,000 60,000
8.625% due 1993 — — 2,750 2,750 5,500 89,000 100,000
5.25% due 1994 3,200 3,200 3,200 3,200 3,200 74,400 90,400
6.25% due 1996 1,700 1,700 1,700 1,700 1,700 39,800 48,300
5% Subordinated Guaranteed
Sinking Fund Debentures
of a subsidiary 30,000 30,000
Capitalized Building Lease
Obligation .- 21,788 21,788
Swiss Franc Notes of a sub-
sidiary-7% 21,517 21,517
Other Domestic Borrowings
(3% to 7.4%) 2,709 2,519 2,218 1,898 1,904 6,348 17,596
Other Foreign Borrowings
(6.3% to 11%) 7.893 5,217 5.373 5.710 2,146 2,501 28,840
Total $31,572 $31,706 $34,311 $54,503 $48,487 $415,917 $616,496
Less amount due within one year 31,572
Long-term Obligations $584,924
11-33
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TABLE 11-12
Business Category
Cement
Aggregates
Chemicals
Aerospace
*MMA
Total
Add: Investments
Earnings be
Deduct: Interest
Taxes on
Minority
Net Earnings
MARTIN MARIETTA <
Net Sales
1972 % Total
114.8 11%
99.0 10%
84.0 8%
545.5 52%
203.6 19%
$1,046.8
Other
interest & taxes
ncome
nterest
CORP.
1971 1972
$M-f 1 1 •{ j-ino-.-.-.-. —
122.1 20.0
90.0 16.9
71.1 24.7
469.0 32.4
206.7 10.6
$958.8 $104.6
+ 4.5
109.1
- 22.4
- 32.9
- 0.3
$ 53.5
Earnings
% Total 1971
18% 17.3
15% 14.0
23% 18.8
30% 38.5
10% 9.6
$98.2
+10.5
108.7
-17.6
-37.4
- 0.5
$53.2
11-34
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MMA has a smelter at the Dalles, Oregon (90,000 tons) and at
Goldendale, Washington (104,000 tons/year). The bulk of sales are
channeled through its large rolling mill at Lewisport, Kentucky. MMA
has an extrusion facility in Torrance, California, primarily producing
specialized shapes for the aerospace-defense industry on tne West Coast ,
but increasingly in commercial markets.
The company has .lompleted an alumina refinery at St, v'roix, V.I,,
which has enough capacity to supply MMA's two smelters in rht P)
Inc.—formed by several aluminum companies with the Republic of Guinea
to develop these high quality deposits. MMA has a 20% participation i>;
Halco. MMA's investment to date in Halco is $6.8 MM ($4.6 MM nut).
Most of MMA's aluminum was transferred to its own mills for fabi uM-
Lion, whereas in previous years much of its requirement for primary
metal was purchased from others. The increase in productive capacity
of primary metal will have greater significance for earnings in years
when aluminum ingot prices are at a more normal level.
At the Company's rolling mill at Lewisport, Kentucky, where rapaiiJty
has been increased within recent years, conversion costs have bten reduced.
The mill is well located in relation to its markets, and its \ty~2 pi odiu -
tion was above the previous year. At year's end thu Lewisport mill was
running at capacity. The Company feels that demand for sheet and p.!ate
is exceptionally strong throughout the industry; capacity limits of the
industry are being pressed and delivery lead times are well extended.
MMA states ."Most indicators seem to point to further price imporvement.s
in these product areas."
The Boke bauxite project, the alumina refinery at St. Croix, the
two smelters in the Northwest, and the rolling mill at Lewisport, Kentucky,
taken together, represent approximately 94% of the book value of the Company's
fixed assets.
The investments made in recent years in the aforementioned facilities,
and the resulting increase in primary metal capacity have shifted the center
of gravity of the company away from its older facilities at Torrance,
California. These latter facilities were oriented originally toward
the defense market but their operating results have for some time penalized
total company earnings.
Accordingly, both the facilities and the product lines have been the
subject of intensive analyses from which certain conclusions were reached
in 1972 and are being implemented in 1973.
11-35
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Capital expenditures at Torrance have been restricted and, in 1972,
the company withdrew from the aluminum foil business and decided to no
longer participate in the automatic screw machine business. Both of
these product areas had been unprofitable. The latter business was
almost entirely defense oriented and, in fact, most of the facilities
are old and are government owned.
Early this year MMA decided to serve its West Coast customers for
sheet and plate producers from the Lewisport plant to the extent that it
will be practicable to do so. This step will eliminate a small sheet mill
at Torrance that has resulted in losses. Also, MMA decided to withdraw
from the soft alloy extrusion business on the West Coast. The company
states this activity had been unprofitable in competition with many small
specialized extruders who use large quantities of scrap and are able to
operate such a business in a more cost-competitive manner.
Long-Term Debt
MMA's long-term debt is approximately $150 MM—representing about
47% of the sum of debt plus equity, and almost half of the parent company's
long-term debt. Interest charges were about $14 million in 1972 (before
interest capitalization on funds used in construction), and debt maturities
(principal) for 1973 are a similar amount. Details are shown in Table 11-13.
4. Revere Copper and Brass, Inc.
American Smelting and Refining Company, "Asarco," owned of record 33%
of the common stock of Revere outstanding December 31, 1972, and 41% of
the outstanding 5-1/2% convertible debentures due 1992.
Revere's principal business is the production and sale of nonferrous
metal products in three product classes: (1) mill products; (2) primary
aluminum; and (3) utensils and other products.
Mill Products
Revere produces and sells a full line of nonferrous metal products
in copper, aluminum and many alloys. Principal markets for the Company's
brass mill products are automotive, building and construction, electrical,
air conditioning and refrigeration, appliances, defense and component parts
such as screw machine products, forgings, stampings and other products.
11-36
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EXHIBIT 11-13
MARTIN MARIETTA ALUMINUM. INC.
LONG-TERM OBLIGATIONS
December 31, 1972
December, 3J, 1971
Current
Portion
Bank loans at 5 1/2%
5 1/2% $ —
Revolving bank loans
(1)
Noncurrent Current NoncurrenL
Portion Portion Portion
$ — $ 6,750,000 $ —
53,000,000
Bank term loans (1) 12,000,000 48,000,000
Economic Develop-
ment Administra-
tion Loan (2)
9 3/8% Sinking Fund
Debentures (3)
10,000,000
50,000,000
10,000,000
50,000,000
Industrial Revenue
Bonds, Lewisport (4) 1,730,000 39,435,000 1,640,000 41,lb5,000
Other notes and
contracts 217,932 553,533 360,632 4,558,^27
$13.947,932 $147.988.533$61.750,632 $105,723.327
(1) The revolving bank loans of $53,000,000, bearing interest at 1/2%
in excess of the prime rate, were repaid on December 27, 1972 with
the proceeds of the $60,000,000 bank term loans, which are due in
quarterly installments of $3,000,000 beginning March 31, 1973 to
December 31, 1977, and bear interest at 1/2% in excess of the prime
rate (currently 6%).
(2) The loan obtained from the United States Economic Development Admini-
stration in June 1971 bears interest at 4 3/4% and is collateralized
by a mortgage on the Company's Washington reduction plant. The loan
is payable only as to interest for five years and in quarterly install-
ments of $193,860, including interest, for 20 years thereafter.
(3) The 9 3/8% Sinking Fund Debentures, issued June 15, 1971, are due June
15, 1971, are due June 15, 1996. The Company is required to retire
$2,500,000 of debentures annually beginning in 1977.
(4) Lewisport bonds payable represent the outstanding amount of the indus-
trial Revenue Bond issue under the agreements referred to in Note C.
11-37
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In aluminum, the Company produces and sells an extensive line of
mill products including plates, coils, flat sheets, circles, blanks,
foil, extruded shapes, tubes and pipes in a wide range of specifications
and finishes. The principal markets for the Company's aluminum mill
products are consumer durable goods, construction, containers, trans-
portation, packaging, and electrical. Aluminum mill products are also
used in the Company's own fabricating operations; for example, aluminum
sheet is supplied to the Company's wholly-owned subsidiary, Revere
Aluminum Building Products, Inc., where it is processed into aluminum
siding and accessories.
Brass and aluminum mill products are sold directly by the Company
to the using industries. Sales offices of the Company operate in 24
cities in the United States. Both types of mill products also are sold
through specialty distributors, such as plumbing distributors. Consigned
and warehouse stocks and redistribution centers are maintained throughout
the country in strategic cities.
Bauxite and Aluminum
Revere Jamaica Alumina Ltd., a wholly-owned subsidiary of the Company,
has a bauxite mining operation, and a 220,000-ton capacity alumina plant
located in southwestern Jamaica, W.I. Substantially all of the investment
in plant and equipment of the subsidiary is covered for risks of war and
expropriation under a contract of guaranty in effect with the Overseas
Private Investment Corporation (an Agency of the United States Government).
Revere Jamaica Alumina, Ltd., holds a bauxite mining lease from the
Government of Jamaica, for 25 years with a guarantee of extension for a
further 15 years.
Primary Aluminum
The principal markets for the Company's primary aluminum are extruders,
wire mills, foundries, and secondary smelters. Primary aluminum ingot is
sold directly to the using industries and through one major distributor. It
is estimated Revere presently handles about 195,000 tons aluminum metal
per year—120,000 tons from its own reduction plant at Scottsboro, Alabama;
and 75,000 tons as its share of Ormet Corporation's production (see below).
Thus, it is not a major aluminum producer.
Primary aluminum for the Company's aluminum mill products and for
sales to customers is acquired from the Company's primary aluminum reduc-
tion plant in Scottsboro, from Ormet Corporation (50% of the stock of which
11-38
-------
is owned by the Company), from other primary producers, and by melting
and casting primary aluminum and aluminum scrap at the Company's mills.
Alumina for the Scottsboro reduction plant is obtained chiefly from Revere
Jamaica Alumina, Ltd.
Other Products
Utensil products are sold under the Revere Ware trademark to department
stores, independent housewares and hardware distributors, chains, premium
firms and catalog houses. Utensil product lines include copper clad
stainless steel, stainless steel with carbon steel cores and aluminum
utensils with Teflon coatings and a varied line of tea kettles. Utensil
plants are in Illinois, Alabama, and New York.
Other metal products include eyelets, stampings, lockseam tubing,
welded steel tubing, lead and tin foil, zinc engravers' plates, aluminum
building products and electrical switches and wiring devices. These are
generally sold through distributors.
Sales by product classes and total sales during the past five years,
excluding certain transfers to other Company plants, are set out in Table
11-14 in millions of dollars together with the percentage of total sales
by each product class.
Table 11-15 presents a consolidated summary of Revere's operations
for 1968-1972.
Ormet Corporation (and Ormet Shipping, Olin Revere Realty Company)
Revere and Olin Corporation each own 50% of the stock of Ormet Cor-
poration, a corporation engaged in the production of primary aluminum,
and have invested additional sums in notes of Ormet. The three companies
have entered into an agreement which provides that (1) Revere and Olin
will purchase 34% and 66%, respectively, of all aluminum produced by
Ormet and will pay as the price of such aluminum 34% and 66%, respectively,
of Ormet's annual costs. The annual costs, which are to include deprecia-
tion and amortization in amounts not less than Ormet's bond maturities,
are payable even if no aluminum is produced. Such debt maturities to
be included in costs billed to Revere aggregate $2.0MM for 1973, $2.7MM
each year from 1974 through 1977 and $2.1MM in 1978. (2) Revere and Olin
will advance to Ormet 34% and 66%, respectively, or any amounts required
for capital replacements and maintenance of working capital at a prescribed
level. (3) As long as any of Ormet's bonds are outstanding, Olin has the
option to purchase 32% of Revere's interest in Ormet at a price equal to
Revere's cost. The Company carries its investment in Ormet at cost which
amount equals its equity because Ormet's pricing policy for aluminum
sales, as described above, results in its operation producing neither
gains or losses.
11-39
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TABLE 11-14
REVERE COPPER AND BRASS. INC.
SALES BY PRODUCT CLASS
(millions of dollars)
Sales of
Sales of Mill Sales of Primary Utensils and
Year Products Aluminum Other Products
1968 $276.1 81.2% $32.8 9.6% $31.3 9.2% $340.2
1969 301.3 82.9% 34.2 9.4% 27.8 7.7% 363.3
1970 278.4 84.8% 23.7 7.2% 26.2 8.0% 328.3
1971 289.7 86.5% 18.3 5.5% 27.0 8.0% 335.0
1972 320.4 82.0% 34.9 8.9% 35.6 9.1% 390.9
11-40
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TABLE 11-15
REVERE COPPER AND BRASS. INC.
CONSOLIDATED SUMMARY OF OPERATIONS
(millions of dollars)
Net Sales
Cost of Sales
Depreciation &
Depletion
G&A
Interest Expense
Interest and Other
Income
Income Tax Before
Investment Tax
Credit
Investment Tax Credit
1972
$390.9
351.9
12.7
20.3
9.2
1971
$335.0
305.0
6.9
19.0
2.5
1970 1969
$328.0 $363.0
2.0
0.5
1968
$340.0
0.5
1.7
1.09
(1.45)
(.35)
4.0
(4.80)
(.80)
11.11
(.86)
10.25
12.40
(5.20)
7.20
Income (loss) Before
Extraordinary Charge (9.44)
Extraordinary Charge
Net Income (loss)
(9.44)
3.62
1.75
1.87
9.09
9.09
12.13
12.13
16.79
16.79
11-41
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Revere and Olin also own 50%, respectively, of the stock of Ormet
Shipping Corporation, which owns and operates three bauxite carrying
vessels under charter with Ormet Corporation. The Company's investment
in Ormet Shipping Corporation is carried at cost, which amount equals
its equity. Revere and Olin are partners in Olin Revere Realty Company,
a firm which acquires and leases new plant facilities to Ormet. The
Company's 50% investment in Olin Revere Realty Company is carried at
equity.
In November 1972, Olin announced its intention of disposing of all
of its aluminum assets, which include large domestic aluminum fabricating
plants and its investment in Ormet, on a "going concern" basis. Under
the agreement between Olin and Revere pursuant to which Ormet was organized,
Revere has the right of first refusal in connection with any sale by
Olin of its interest in Ormet. Revere's management does not foresee
any adverse effects on Revere's investment in Ormet, Olin Revere Realty
or Ormet Shipping Corporation as a result of the disposal by Olin of its
aluminum facilities.
Long-Term Debt
Lease obligations - Construction of the aluminum rolling mill and
the aluminum reduction plant at Scottsboro, Alabama, was financed by
industrial revenue bonds issued by the Industrial Development Board of
Scottsboro in 1965 ($60MM), and 1967 ($97MM). The plants are leased
to the Company under leases which expire in 1987 and 1990, respectively,
at rentals sufficient to pay the interest and principal retirement require-
ments of the bond issues. The Company has the right to purchase the
rolling mill from July 1975, and the reduction plant from December 1977,
until termination of the respective leases, for an amount in each instance
sufficient to redeem all outstanding bonds of the applicable issue. For
accounting and tax purposes the projects are treated as constructed and
owned by the Company. There are three similar revenue bond issues totaling
$6.5MM for plant facilities at Newport, Arkansas; Monett, Missouri; and
Anderson County, South Carolina. Retirement requirements to be included
in rent payments aggregate about $5 million per year over the next five years.
The $55 million proceeds of the 5-1/2% Convertible Subordinated
Debentures due 1992 sold in 1967 were used to partially finance the develop-
ment of bauxite mining facilities and construction of the alumina plant
in Jamaica.
5. Reynolds Metals Company
Reynolds Metals Company is the second largest U.S. producer of primary
aluminum and manufactures aluminum products for a broad variety of industries.
II-42
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Reynolds' rated annual domestic primary aluminum capacity of 975,000
tons was approximately 20.4% of the reported total rated domestic capacity
of 4,771,000 tons as of December 31, 1972.
Reynolds distributes its industrial-related products principally
through direct sales from its manufacturing plants to converters, fabri-
cators, and distributors, and its consumer-related products principally
through sales to wholesale and retail distributors.
Net sales for the five years ended December 31, 1972, are presented
in Table 11-16.
The net income after taxes for Reynolds was only $0.19MM in 1972,
compared to $5.6MM in 1971 and $46.9MM in 1970. Included in these was
equity in income to subsidiaries and associated companies of $40.4MM in
1972, $37.4MM in 1971, and $50.5MM in 1970—each larger than Reynolds'
pre-tax income in the respective years, indicating the poor results of
Reynolds' domestic aluminum business.
Looking at the consolidated statements, the overall pre-tax income
was $5.1MM deficit in 1972, $5.5MM in 1971, and $69.5MM in 1970. In the
consolidated statements, the equity in income of unconsolidated subsidiaries
and associated companies added only $7MM in 1970, $3.9MM in 1971, and $5.5MM
in 1972; however, the latter was still large compared to 1972 net results.
Properties
Reynolds mines bauxite in Jamaica, Arkansas, Haiti and Guyana. It
produces alumina at Hurricane Creek, Arkansas; Corpus Christi, Texas; and
Nain, Jamaica. Reynolds Jamaica Alumina, Ltd., a wholly-owned subsidiary
of Reynolds, formed a partnership, Alumina Partners of Jamaica, with
Anaconda Jamaica, Inc., a wholly-owned subsidiary of The Anaconda Company
and Kaiser Jamaica Corporation, a wholly-owned subsidiary of Kaiser Aluminum
and Chemical Corporation, under the laws of the State of Delaware, for the
processing of bauxite into alumina at Nain, Jamaica. Primary aluminum
is produced at Listerhill, Alabama; Longview, Washington; Jones Mills and
Arkadelphia, Arkansas; Troutdale, Oregon; Corpus Christi, Texas; Massena,
New York; and Baie Comeau, Canada. Primary aluminum production for
Reynolds in 1972 was 938,501 short tons.
Additionally, Reynolds' proportionate share in primary aluminum capacity
of foreign companies (other than Canadian Reynolds Metals Company Limited)
in which it has varying degrees of interest is 121,700 tons.
Long-Term Debt
Reynolds owns all of its principal plants and machinery except that
part of the land and buildings of certain can plants held under a long-
11-43
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TABLE 11-16
REYNOLDS METALS COMPANY
NET SALES
Primary Aluminum (1)
Tons (2) Amounts
Aluminum
Fabricated
Products
Other
Sales
Total
Net Sales
(In Millions of Dollars)
1968
1969 (2)
1970
1971
1972
304.6
474.3
495.2
376.2
357.0
$143.1
232.9
255.2
185.5
164.2
$613.8
683.0
664.6
759.1
863.3
$ 86.9
96.7
115.3
148.6
134.7
$ 843.8
1,012.7
1,035.2
1,093.2
1,162.2
(1) Includes small quantities of secondary aluminum.
(2) Includes Canadian Reynolds Metals Company, Ltd. from 1969.
11-44
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term lease. Substantially all the land, buildings and equipment of
the Reynolds Metals Company in the United States are subject to the
lien of the mortgage securing its First Mortgage Bonds.
Reynolds' property additions and retirements are shown in Table II-
17. Reynolds has built up a very high debt-to-equity ratio and this,
combined with the extremely high capital intensity of the primary alumi-
num business, provides enormous financial leverage in Reynolds' financial
outlook. A very small change in the operating rate or cost or price of
aluminum will be magnified in the resulting changes in Reynolds' earnings
and profitability.
Table II-7 presents the recent cash flow (net income plus depreciation
and other noncash charges against reported earnings) picture for Reynolds.
6. Capital Availability
As is widely appreciated, the aluminum industry is probably one of
the most, if not the most, capital intensive major manufacturing industries
in the world. Tables II-6 and II-7 and details which have been discussed
herein demonstrate that the capital expenditure programs of the "Big 3"
have been massive, as have their long-term financing. In general, aluminum
properties have been financed largely with long-term mortgages secured
by their assets. The companies have benefited in the early days from
various forms of government financial assistance (both domestically and
internationally); more recently in the U.S. community industrial revenue
bond financing has been utilized by these companies.
Aluminum companies typically have relatively high debt-to-equity
ratios. The companies thus are highly leveraged financially and, depend-
ing on the particular circumstances, may or may not be in a position to
attract any additional capital at any given moment.
D. PRICE EFFECTS
1. Determination of Prices
It is very difficult to determine a market price for either bauxite
or alumina since nearly all sales of both are made internally to company-
owned plants and, therefore, are not readily available on the open market.
This situation, in the case of alumina availability, has begun to change
recently for a number of reasons. One of these is the fact that economies
11-45
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TABLE 11-17
REYNOLDS METALS COMPANY
PROPERTY ADDITIONS AND RETIREMENTS
Year Additions Retirements Net Additions
(In Thousands of Dollars)
1968 $127,372 $14,330 $113,042
1969 128,600 13,765 114,835
1970 112,670 13,183 99,487
1971 79,319 10,736 68,583
1972 70.079 11.913 58.166
Total $518.040 $63.927 $454.113
11-46
-------
of scale require alumina plants to be very large in order to be competi-
tive, and this has led to the need to form worldwide consortia to exploit
new bauxite deposits and produce alumina. The participation of different
aluminum producers and of other interests besides aluminum producers
in alumina investments has led to a greater readiness on the part of
alumina plants to sell their product under long-term contracts to non-
participants in the venture.
The two Arkansas plants produce a variety of products each with its
own market price which tends to make price determination even more com-
plicated. For this reason, we will limit our discussion of price deter-
mination to alumina which is produced for the eventual use in the production
of aluminum metal. This one use accounts for about 80-85 percent of the
alumina produced domestically.
a. Alumina availability
There is little opportunity to spot-purchase alumina on the world
market, and in those instances where spot purchases are made, the prices
paid are usually substantially higher than those paid on long-term contracts.
One of the reasons why there are few spot sales of alumina is the fact
the alumina producers usually invest in additional alumina capacity only
when they are assured of long-term market outlets through either captive
requirements or long-term contractual sales. They do not invest in alumina
capacity with the expectation of simply trying to sell the product on the
world market. Since up to now the major aluminum producers have controlled
most of the alumina production capacity, this policy has allowed them to
maintain a reasonable balance between worldwide alumina demand and supply.
This situation may change as more and more private investment interests
participate in alumina plants built throughout the world.
Besides the major integrated aluminum producers in the Western World,
the only other significant potential suppliers of large quantities of alumina
on a long-term basis are the state-owned companies of the Socialist countries.
Since arrangements for the purchase of alumina from the countries will be
made through government-to-government agreements, we do not know, nor can
we find out, the sales policies of these countries in regard to alumina.
We do know that some alumina is traded among Socialist countries in Eastern
Europe and that the Soviet Union currently imports some alumina from the
Western World countries to supplement its own supplies.
Also, in some cases where raw materials are transferred between com-
panies, barter agreements are made whereby the buyer of the raw material,
either bauxite or alumina, pays the seller in the form of a refined product,
either alumina or aluminum. Therefore, no purchase prices are quoted in
the transaction.
11-47
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b. Price trends
However, from what information is available, some estimates can be
made. In the early 1960's, most intercompany sales of alumina f.o.b.
Caribbean ports were in the range of $45-50/short ton. These prices
rose to $50-55/short ton in the later 1960's and contracts in 1969-70
are closer to $60-65/short ton f.o.b. alumina plant. The f.o.b cost
of alumina from other plants in the Western World processing indigenous
bauxite using a Bayer process is in general similar to these prices.
One of the major factors responsible for the increase in the inter-
company prices of alumina during this period was the fact that alumina
prices are usually related to posted aluminum metal prices through an
escalation clause in the contract. For example, the current posted
price of aluminum in the United States is in the range of 26c/lb. where-
as the price in the early 1960's was in the range of 23c/lb. and has
been as high as 29
-------
55
50
45
40
35
3 30
5
4 25
20
15
10
l\ A
./'
Ix~
1
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975
Year
FIGURE II-6 PRICE HISTORY OF PRIMARY ALUMINUM
1980
11-49
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TABLE 11-18
U.S. IMPORTS FOR CONSUMPTION OF BAUXITE
Quantity Total Value Average Value f.o.b,
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
(Thousand Long Tons)
10,575
9,212
10,180
11,199
11,529
11,594
10,976
12,160
12,620
12,326
(Thousand Dollars)
121,888
114,546
128,787
142,989
147,335
151,418
140,228
165,639
156,362
153,639
(Dollars /Long Ton)
11.53
12.43
12.65
12.77
12.78
13.06
12.78
13.62
12.39
12.46
Totals 112,371 1,422,831 12.66
SOURCE: Minerals Yearbook
11-50
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TABLE 11-19
U.S. IMPORTS OF ALUMINA FOR
USE IN PRODUCING ALUMINUM
Quantity Total Value Average Value f.o.b.
Year (Thousand Short Tons) (Thousand Dollars) (Dollars/Short Ton)
1965
1966
1967
1968
1969
1970
1971
227
489
952
1,317
1,912
2,555
2.391
13,527
27,383
50,173
73,295
106,333
152,537
138,841
59.59
56.00
52.70
55.65
55.61
59.70
58.07
Totals 9,843 562,089 57.11
SOURCE: Minerals Yearbook
11-51
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TABLE 11-20
AVERAGE VALUE OF U.S. IMPORTS OF BAUXITE. 1971
Average Value, Port
of Shipment
Country (Dollars/Long Ton)
Australia 10.68
Brazil 8.57
Dominican Republic 16.58
Greece 8.41
Guinea 4.93
Guyana 11.20
Haiti 9.86
Jamaica 12.76
Surinam 11.12
SOURCE: Minerals Yearbook Preprint, 1971
11-52
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TABLE 11-21
AVERAGE VALUE OF U.S. IMPORTS OF ALUMINA
FOR USE IN PRODUCING ALUMINUM. 1971
Average Value, Port
of Shipment
Country (Dollars/Short Ton)
Australia 53.69
France 57.01
Germany, West 98.00
Greece 62.71
Guyana 71.A6
Jamaica 66.99
Japan 72.32
Surinam 58.00
SOURCE: Minerals Yearbook Preprint, 1971
11-53
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TABLE 11-22
I
Ln
DOMESTIC MINE PRODUCTION OF
Year
1962
1963
1964
1965
1966
1967
1968
1969
1970<1)
1971
Quantities
(Thousand Long Tons)
Arkansas Total U.S.
1,270
1,478
1,562
1,593
1,718
1,571
1,582
1,755
1,869
1,781
1,369
1,525
1,601
1,654
1,796
1,654
1,665
1,843
2,082
1,988
BAUXITE
Total Value
(Thousand Dollars)
Arkansas Total U.S.
14,606
16,701
17,431
17,974
19,439
18,269
23,058
24,706
26,293
24,979
15,609
17,234
17,875
18,632
20,095
19,079
23,752
25,725
30,070
28,543
Average Value f .o.b.
(Dollars/Long Ton)
Arkansas Total U.S.
11.50
11.30
11.16
11.28
11.31
11.63
14.58
14.08
14.07
14.03
11.40
11.30
11.16
11.26
11.19
11.54
14.27
13.96
14.44
14.36
(1)
Includes data for Oregon and Washington.
SOURCE: Minerals Yearbook.
-------
develop costs for alumina production since most bauxite is transferred
intracompany and is not sold on the open market. A Bayer plant which
is dependent on purchased bauxite has an added cost which is equal to the
profit taken by the bauxite vendor, all other costs being equal. For this
reason, as mentioned earlier, an alumina producer has not been able to
grow to an appreciable size without obtaining its own bauxite supply.
Table 11-23 presents the production costs for typical Bayer plants
of various sizes located in the Gulf Coast area. Trihydrate (gibbsite)
material averaging about 53% A^C^ and 3% silica is processed utilizing
the American Bayer process. One ton of alumina is produced for every
2.1 tons of bauxite consumed. This represents a recovery of about 90 percent,
The bauxite cost is our approximate estimate of the cost to a Bayer
plant from a company-owned mine. This involves mining, crushing, drying,
transportation and handling costs.
Bayer plants which must process different types of ores or must
purchase their ores or have varying transportation distances will, as
a result, have a different set of criteria for calculating their production
costs for alumina. A $1.00 change in the cost of bauxite will change
the cost of alumina by slightly more than $2.00 as seen from Table 11-23.
We expect that the cost of producing both bauxite and alumina will
continue to increase in the future as it becomes necessary to process
lower grades of bauxite ore, as plant construction costs continue to
rise leading to higher capital charge', and as labor costs increase.
In addition, the Bayer process is being utilized at so close to its
theoretical efficiency limit that we do not expect any major technolo-
gical improvements in the process in the near future. At the same time,
we believe that product prices will continue upward, thus, offsetting
any normal increases in cost.
3. Purchase Contracts
Most alumina bought on the open market is in large amounts and on
long-term contracts. Contracts for annual supplies over 100,000 short
tons of alumina per year are for a long-term period,typically ranging
from 10 to 20 years. Contracts for smaller quantities of alumina are
made but usually for shorter periods.
Bauxite ore can also be sold in this manner, but this case is much
more rare than the alumina sales contract. Almost all alumina producers
have captive bauxite sources. This is one requirement mentioned earlier
for sustained growth as an integrated aluminum producer.
11-55
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TABLE 11-23
M
M
Ui
GENERAL PRODUCTION COSTS FOR ALUMINA (TRIHYDRATE)
($/Short Ton Al 0 )
Units per Plant Size (S. Tons /Year)
Units Ton/Al 0 $/Unit 200,000
S. Tons 2.1 10.00 21.00
S. Tons 0.08 53.00 4.20
S. Tons 0.06 20.00 1.20
steam MMBTU 9.4 .25 2.40
KWH 330 .004 1.30
erating and maintenance) 3.00
15.80
or) 7.90
500,000 1,000,000
21.00
4.20
1.20
2.40
1.30
3.00
9.20
4.60
21.00
4.20
1.20
2.40
1.30
3.00
6.20
3.10
Item
Materials
Bauxite
Caustic Soda
Lime
Utilities
Fuel for calcination and steam
Electric power
Materials and Supplies
Labor @ $4.20/hour
Plant Overhead (50% of labor)
Total Direct Costs (excluding depreciation, taxes,
insurance, interests, profits)
Estimated Fixed Charges in Addition (at 14% of capital investment)
56.80
33.60
46.90
26.60
42.40
23.50
SOURCE: ADL Estimates.
-------
There are wide variations in the terms of alumina purchase contracts,
and every new contract tends to be slightly different from previous ones.
The final contractual terms in most cases depend largely on the negotiating
skill and imagination of the purchaser and seller. There are, however,
some generalizations that can be made on these contracts.
Most contracts are for f.o.b. sales, although some producers are
interested in c.i.f. sales because of their interest in the shipping
contract. Alcoa, in particular, which has very large shipping interests,
has considerable interest in c.i.f. sales contracts.
Practically all contracts contain an escalation clause that relates the
sales price of alumina either to an agreed-upon posted price of aluminum
metal or to cost indices related to the production cost of alumina. The
cost indices used in the past have included fuel costs, secondary raw
material costs, interest rates, and sometimes a general wholesale price
index. In some cases, the sales price of alumina is related to a com-
bination of metal prices and cost indices according to a specified formula.
Although cash payment is usually specified for purchases of alumina,
some contracts provide for barter arrangements. In these contracts, the
purchaser usually pays the seller in supplier of metal at a specified
exchange rate. This arrangement allows the buyer of alumina to eliminate
the selling expense associated with a percentage of his total production.
This expense may run from lc to 3c per Ib. of metal depending on the dis-
counts made or credit advanced to customers. Also this arrangement allows
the alumina buyer, who is producing aluminum, to operate his facility at
a higher output since he has a guaranteed market for the increased pro-
duction. This results in a savings to him since his operation is more
efficient as his production level approaches full capacity.
Most contracts are take-or-pay agreements. This means that the
purchaser must take a given quantity of alumina at specified periods,
or else he must pay an agreed-upon penalty usually equal to the value
of the alumina.
Most contracts contain a "force majeure" clause. Under this clause,
neither the seller nor the buyer is in breach of contract if he cannot
deliver or accept supplies of alumina due to events beyond his control
such as strikes, fire, explosion, war, blockade, etc.
Since there are no industry-wide quality standards for alumina,
contracts usually simply specify impurity levels. The impurities
specified usually include Si02, Fe20~, TiC>2, and Na20. The maximum
11-57
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moisture content is also usually specified. In addition to the above,
the physical characteristics of the alumina are specified including a
screen analysis of the material.
In most cases, the buyer must specify his requirements 6 to 12 months
in advance of delivery. He must also supply the seller with a shipping
schedule at least 4 to 6 months before the first delivery on this schedule.
In order to show the details of a specific typical purchase contract,
we have presented in the Appendix a copy of an expired contract for the
sale of approximately 54,000 short tons of alumina per year over a period
of ten years. One clause which appears in this contract but is not found
in more recent contracts is the requirement that the buyer put up a size-
able portion of the purchase price as an advance payment. (See Article
21 in the contract in the Appendix).
E. ASSESSMENT OF ECONOMIC IMPACT
The analysis for each level of control technology will be presented
separately. Within each level the economic impact of water pollution
guidelines on the domestic bauxite refining industry will be assessed
on a plant-by-plant basis. This method of approach will permit a fairly
detailed analysis of each plant's possible problem areas, if any.
In assessing the overall economic impact for each level, we will
focus on such things as price increases, plant closings, unemployment,
community impacts, industry growth, and balance of payments.
F. IMPACT ANALYSIS
This study assesses only that economic impact due to proposed water
pollution guidelines. It does not consider costs due to compliance with
air pollution guidelines. However, a cursory examination shows that the
bauxite refining industry has a very minimal, if any, air pollution problem.
The purpose of this analysis is to assess the economic impact of the
guidelines proposed by the Effluent Guideline Development Document for the
bauxite refining industry. These guidelines are:
1. Proposed Best Practicable Technology (B.P.T.) - to be met
by industrial dischargers by 1977.
2. Proposed Best Available Technology (B.A.T.) -- to be met by
1983.
3. Proposed New Source Performance Standards (N.S.P.S.) - to be
applied to all new facilities (that discharge directly to navi-
gable waters) constructed after the promulgation of these guide-
lines (approximately January 1, 1974).
11-58
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1. Proposed Guidelines
The guidelines for all three levels of control proposed presently
by the Environmental Protection Agency (EPA) would permit a bauxite
refining plant to discharge an amount of water equal to the amount by
which rainfall exceeds the natural evaporation. This amount would be
applicable to only that rainfall landing directly in impoundment areas
such as active and dormant mud lakes and neutralization lakes.
There is some question as to how this quantity of water would be
measured and also as to what the quality of the water should be since
water landing in the mud lakes would obviously become contaminated with
process water. There are no quality restrictions on the discharged
water.
2. Costs
The costs for the industry to meet the proposed recommendations
were the proposed recommendations were provided by the EPA and are
presented in Table 11-24. These costs were developed by the EPA, The
costs, in general, seem to be reasonable order-of-magnitude costs for
the implementation of the proposed guidelines. Of course, detailed
engineering estimates would need to be done to arrive at an exact cost.
3. Industry Segmentation
For purposes of the economic impact analysis, we have divided the
bauxite refining industry into three segments or groups:
• No Impact
• Moderate Impact
• High Impact
The following criteria were used for placing the plants in the
various groups:
1. No impact means that a plant will have negligible cost imposed
by the proposed effluent guideline.
2. Moderate impact means the plant will incur an incremental opera-
ting cost of 0.5C/lb. or less of contained aluminum and an addi-
tional capital investment up to 15 percent of the estimated 1973
plant replacement cost.
3. High impact means the plant's additional operating cost will be
greater than 0.5C/lb. of contained aluminum and the added capital
investment will be greater than 15 percent of the estimated
1973 plant replacement cost.
11-59
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TABLE 11-24
ESTIMATED INVESTMENT AND OPERATING COSTS
FOR TOTAL IMPOUNDMENT
PLANT NUMBER
1.
2.
3.
4.
5.
6.
7.
8.
. 9.
Totals
CAPITAL INVESTMENT
$ 2,400,000
1,000,000
22,700,000
0
1,250,000
36,500,000
200,000
0
0_
$64,050,000
ANNUAL OPERATING COST
$ 500,000
210,000
5,500,000
0
260,000
9,600,000
40,000
0
0_
$16,110,000
SOURCE: Environmental Protection Agency
H-60
-------
Estimated Replacement Costs
Figure II-7 presents a plot of estimated 1973 capital investment
vs. capacity for Bayer alumina plants. These estimated investments are
only for the plants themselves and do not include investment in infrastruc-
ture facilities, land, docks, and wharves. It also does not include
settling ponds or other techniques for dealing with the production plant
residues and effluent wastewater.
The existing Bayer plants range in size from 375,000 to 1,460,000
short tons of alumina per year, representing replacement costs of about
$77 million to $225 million per plant, respectively.
Segments
Table 11-25 presents the estimated investment and operating costs
to meet the guideline summarized, by industry segment, while Table 11-26
shows the added capital investment as a percentage of the estimated replace-
ment cost. It also presents the operating costs in dollars per ton of
alumina produced and in cents per pound of contained aluminum. The infor-
mation presented in Table 11-26 is consolidated for each segment to prevent
identification of single plants. There is no need to include the "no
impact" segment.
4. Basis for Analysis
In this section, we discuss the possible impact of the proposed
guidelines from the following viewpoints:
• Price effects and plant shut down probabilities
• Financial effects - corporate impact
• Production effects
• Balance of payments
• Employment and community effects
In general, the capital and operating costs to achieve pollution
abatement would not be incurred by the companies in the absence of
pollution abatement regulations, i.e., they cannot be justified on
the basis of conventional return-on-investment criteria. In plant-by-
plant and company-by-company analysis of pollution abatement impact,
two viewpoints have to be considered. The availability of capital for
pollution abatement equipment at each plant has to be viewed from the
standpoint of the resources available to the entire corporation. However,
the justification for spending this capital at a particular plant would
result from a study of that particular plant's economics which would
take into account alternatives such as cost of production from a refitted
plant, shifting production to other plants, and most important, the
probability that this particular plant will remain a profitable entity.
11-61
-------
1000
o
"O
»*-
o
8
o
~ 100
c
0)
tt
c
Q.
ro
O
10
0.1
I 1 I ILL
I I I I I I
1.0
Alumina Capacity (millions of annual short tons)
10.0
Source: Arthur D. Little, Inc., estimates
FIGURE 11-7 U.S. BAYER PLANTS - ESTIMATES OF CAPITAL INVESTMENT
VERSUS CAPACITY - 1973
11-62
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TABLE 11-25
ESTIMATED INVESTMENT AND OPERATING COST
FOR TOTAL IMPOUNDMENT BY INDUSTRY SEGMENT
SEGMENT AND PLANT NUMBER CAPITAL INVESTMENT
High Impact
3.
6.
Sub-totals
Moderate Impact
1.
2.
5.
7.
Sub-totals
No Impact
$22,700,000
36,500,000
$59,200,000
$2,400,000
1,000,000
1,250,000
200,000
$ 4,850,000
ANNUAL OPERATING COST
$ 5,500,000
9,600,000
$15,100,000
$ 500,000
210,000
260,000
40,000
$ 1,010,000
4.
8.
9.
SOURCE: Environmental Protection Agency
11-63
Totals $64.050,000 $16.110.000
-------
TABLE 11-26
RELATED INFORMATION ON COSTS FOR TOTAL IMPOUNDMENT
HIGH IMPACT MODERATE IMPACT
ITEM SEGMENT SEGMENT
SOURCE: ADL Estimates
Investment as percen-
tage of replacement
cost 18 0.8
Annual operating cost
($/ton of alumina) 7.80 0.26
Annual operating cost
(C/lb. of aluminum) 0.7 0.02
11-64
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In an impact analysis, prediction of plant shutdowns is difficult
since such a decision is based on a wide variety of factors as noted above.
On the other hand, independent analysis of what a proposed venture or
program of expenditures might do to the firm in the eyes of the financial
community can be undertaken with more confidence by securities analysts
and investment bankers, for there are usually somewhat analogous situations
from which to draw inferences and because such inferences can be drawn
from data of the kind generally supplied to such individuals and organizations
and to the SEC.
In general, we would assume that a large industrial corporation which
is clearly viable, profitable, and is acknowledged to have strong managerial
and technical resources, will have access to substantial capital—in the
form of debt or equity or both, plus pollution control bonds as a source of
"off the balance sheet" financing.
5. Price Effects
Although a large amount of alumina produced in the U.S. is for captive
use, a significant amount is sold and the price of alumina is more of an
open market price than an internal transfer price. Past history shows that
this price is not subject to rapid fluctuations and has gradually increased
with increasing operating costs.
Table 11-27 presents estimated operating costs for 1972 in dollars
per ton of alumina produced for various size Bayer plants and Table 11-28
shows average values for 1971 of U.S. imports of alumina for use in pro-
ducing aluminum. Comparing the cost in Table 11-27 for the largest plant
($65.90 per short ton) with the overall average in Table 11-28 ($67.52 per
short ton) it appears that the average value of alumina today is between
$65 and $70 per short ton. A value of $70 is assumed for purposes of this
analysis.
The added operating cost of $7.80 per ton for the high impact group
and $0.26 per ton for the moderate impact group is equivalent to increases
of 11 percent and 0.4 percent, respectively, above the original base value
of $70 per ton. The increased cost incurred by the high impact segment
is truely significant. A cost increase of this magnitude affecting only
24 percent of the U.S. production capacity cannot be passed-on and could
be absorbed with great difficulty. Thus, there is a clear indication of
a high impact upon this entire segment.
The increased cost to the moderate impact segment of $0.26 per ton
of alumina could be either passed-on or absorbed under normal circumstances.
Even if the cost cannot be passed-on, the magnitude of this cost is such
that there should only be a minimal effect on this group.
11-65
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TABLE 11-27
Item
Materials
Bauxite
Caustic Soda
Lime
Utilities
Fuel for calcination and steam
Electric power
Materials and Supplies (
Labor @ $4.20/hour
Plant Overhead (50% of labor)
GENERAL PRODUCTION COSTS FOR ALUMINA (TRIHYDRATE)
($/Short Ton Al 0_)
Units per
Plant
Units Ton/AUO,. $/Unit 200,000
f. j —
S. Tons 2.1 10.00
S. Tons 0.08 53.00
S. Tons 0.06 20.00
I steam MMBTU 9.4 .25
:rat
•r)
ng
ice,
KWH 330 .004
:ing and maintenance)
depreciation, taxes,
interests, profits)
Addition (at 14% of capital investment)
21.00
4.20
1.20
2.40
1.30
3.00
15.80
7.90
56.80
33.60
Size (S.
500.000
21.00
4.20
1.20
2.40
1.30
3.00
9.20
4.60
46.90
26.60
Tons /Year)
1.000.000
21.00
4.20
1.20
2.40
1.30
3.00
6.20
3.10
42.40
23.50
Source: ADL Estimates
-------
TABLE 11-28
AVERAGE VALUE OF U.S. IMPORTS OF ALUMINA
FOR USE IN PRODUCING ALUMINUM. 1971
Average Value, Port
of Shipment
Country (Dollars/Short Ton)
Australia 53.69
France 57.01
Germany, West 98.00
Greece 62.71
Guyana 71.46
Jamaica 66.99
Japan 72.32
Surinam 58.00
Average 67.52
SOURCE: Minerals Yearbook Preprint, 1971
11-67
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Another measure of a company's ability to absorb increased costs
is to compare the cost increases per pound of aluminum to the base cost
of producing aluminum on the assumption that an integrated company can
spread this cost over all components of primary metal productions. The
current posted price of aluminum in the United States is in the range
of 26c/lb. The typical margin for the industry is l-2c/lb. and at most
3c/lb. Therefore, the increase of 0.7C/lb. for the high impact group
would be significant. Again, the moderate impact group would be mini-
mally effected.
Although the increased annual operating cost of 0.7c/lb. of aluminum
is less than the normal l-2c/lb. margin mentioned above, this cost still
places these plants in a "gray area" where it would be entirely the manage-
ment's decision as to whether or not the plants close.
6. Financial Effects - Corporate Impact
Although plant closings in the high-impact segment cannot be predicted
with certainty, the shutdown of the high-impact segment would result in
a major domestic producer losing over 74% of its alumina supply for domestic
aluminum production. Unless this producer intends to exit from the aluminum
industry, a major readjustment will have to occur. The closing of any
plant is a decision based on a wide variety of factors and includes con-
sideration of factors other than just the incremental cost of pollution
control. These decisions include comparisons of the cost of production
from a refitted plant versus alternatives, such as producing at other domestic
or international plants or new locations, purchasing unfinished or semi-
finished products for down-stream operations or stopping production alto-
gether. These decisions have to be made on the basis of anticipated
future capital and operating expenses and they are particularly difficult
for an outsider to predict because they require access to the company's
highly sensitive, direct out-of-pocket cost information and full knowledge
of the alternatives open to the company's management. In the absence of
detailed information on the cost/benefits of the alternative strategies,
the judgements on corporate impact have to be necessarily qualitative.
It is probable that this major producer will not exit from the aluminum
industry unless forced by circumstances outside its control and, on this
basis, one of the following two courses of action is likely:
• Build alumina capacity overseas
• Undertake capital expenditures at the high impact plants, assuming
costs can be absorbed by other segments of the corporation.
Qualitative arguments in favor of overseas refineries would be the following
and a major constraint would be capital availability.
11-68
-------
• Increased efficiencies
• Location near a raw material source - lower transportation costs
• Pressure from foreign governments for foreward integration
• Last continental U.S. refinery built in 1959
• Less stringent environmental regulations
• The corporation has major holdings overseas and relocating
would not require a new mode of operations
The cost consequences of the second alternative can be assessed in
context of the corporation's sources of revenues, earnings, and record
of performance. Preliminary indications are that this corporation
will be severely affected on this basis. For example, their estimated
pollution related expenditures over the next 4 years, as a percentage
of average rate of capital spending, will be about 30%. This rate of
capital expenditure is high, but is, by itself, probably not critical
since presumably pollution bond financing could be utilized. Much
more serious is that the annual operating costs are 12-15% of the cor-
poration's base pretax operating income.
7. Production Effects
Table 11-29 gives the respective annual alumina capacity and the
percentages of total industry represented by each segment. The result
of closing down the high impact segment would be significant in that
it represents 24 percent of the domestic production of alumina.
8. Balance of Payments
All the other plants in the industry are operating at or near
rated capacity and would not be able to make up the loss in production.
As a result, the closing of this segment would have a negative effect
on the balance of payments to the extent of $135,450,000, less
the value of any bauxite (about $40,000,000) now being purchased over-
seas. This assumes $70 per ton for the value of alumina and $10 per
ton for the delivered value of bauxite.
9. Employment Effects
Presented in Table 11-30 are employment figures for each segment
and percentages of total industry represented by each. Closing down
the high-impact segment would place 1220 workers, or 18 percent of the
industry, out of work. Using a multiplier of 2:1, this would affect
2440 other jobs.
H-69
-------
TABLE 11-29
ANNUAL CAPACITY OF ALUMINA AND PERCENT OF
TOTAL INDUSTRY REPRESENTED BY EACH SEGMENT. 1973
SEGMENT ANNUAL CAPACITY PERCENT OF INDUSTRY
(Thousands of Short Tons)
High Impact 1,935 24
Moderate Impact 3,833 48
No Impact 2.235 28
Totals 8,003 100
SOURCE: ADL Estimates
11-70
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TABLE 11-30
EMPLOYMENT AND PERCENT OF TOTAL INDUSTRY
FOR EACH SEGMENT. 1973
SEGMENT EMPLOYMENT PERCENT OF INDUSTRY
High Impact 1220 18
Moderate Impact 2730 41
No Impact 2705 Al
Totals 6655 100
SOURCE: ADL Estimates
11-71
-------
The two plants in the high-impact segment and representing a high
possibility of closing are located in the Gulf Coast area. Two communities
will be impacted with a loss of an average of 610 jobs each. Most proba-
bly, a good majority would have to relocate and/or work in other industries,
It is very unlikely that new Bayer plants will be built in the area.
Considering the total size of the communities involved, there will be no
major impact on the overall employment situation in these areas.
10. Construction of New Plants
A new plant designed with the proposed guidelines in mind could be
constructed without much difficulty. However, when considering all factors,
it is not likely that a new Bayer plant will be constructed in the continen-
tal U.S.; the last was built in 1959. Some of the more important factors
influencing the location of Bayer plants in foreign countries near the
raw material source are:
• Pressure from foreign governments for foreward integration
• Lower transportation costs for raw material
• Less stringent environmental regulations
• Most large aluminum companies have major holdings overseas
and building a new plant does not require a new mode of
operations.
G. LIMITS OF THE ANALYSIS
1. Accuracy
As mentioned earlier, the costs provided by the EPA are order-
of-magnitude costs and in no way can be used as definitive engineering
estimates.
2. Range of Error
The range of error for costs developed in this manner can at best
be within plus-or-minus 30%. In order to obtain more exact estimates,
an additional amount of time and money would need to be spent in develop-
ing detailed engineering estimates.
3. Critical Assumptions
The major critical assumption made in this analysis was that the
costs for compliance with the proposed water pollution guidelines would
11-72
-------
be the only pollution related cost incurred by the integrated bauxite
refining-primary aluminum industry. There are several trends in the
primary aluminum industry worldwide that would tend to decrease their
profit margin and/or lead to an increase in primary metal price. These
trends are for increases in the cost of raw materials, labor, electric
energy, carbon for electrodes and capital availability. These, plus
incremental pollution related costs in other areas such as air pollu-
tion control in reduction plants, can cumulatively lead to a more severe
impact than described in this report. In addition, the increased price
can change the cost advantage offered by aluminum vis-a-vis other
competing materials (the cross-elasticity phenomenon), thus affecting
the demand for primary aluminum.
4. Questions Remaining to be Answered
There are two major questions remaining to be answered:
a. Will there ultimately be a water quality standard added
to the proposed regulations, and if so, how will this
affect the costs of control?
b. Some plants use lakes for purposes other than mud impound-
ment, such as acid neutralization. Will the rainfall on
these lakes be included in the amount allowed for discharge?
In using the costs developed by the EPA and presented in this study,
it must be remembered that these costs are applicable only to the degree
of control proposed by the regulations described herein and cannot be
construed to apply to any other degree of control.
II-73
-------
PART III - SECONDARY SMELTING AND
REFINING OF ALUMINUM
-------
III. SECONDARY ALUMINUM SMELTING
AND REFINING INDUSTRY
A. INTRODUCTION
This portion of the study was carried out in conjunction with
Charles Licht Engineering Associates, Inc., of Olympia Fields, Illinois.
This company is very active in consulting in the secondary aluminum
smelting industry.
The purpose of this portion is aimed at supplying the Environmen-
tal Protection Agency with information regarding the economic impact on
the secondary aluminum smelting industry of the costs of pollution abate-
ment requirements under the Federal Water Pollution Control Amendments
of 1972 for each of the three levels of control under consideration:
1. Proposed Best Practicable Technology (B.P.T.) - to be met by
industrial dischargers by 1977.
2. Proposed Best Available Technology (B.A.T.) - to be met by 1983.
3. Proposed New Source Performance Standards (N.S.P.S.) - to be
applied to all new facilities (that discharge directly to navig-
able waters) constructed after the promulgation of these guide-
lines (approximately January 1, 1974).
B. INDUSTRY DESCRIPTION*
Secondary aluminum smelters have been in operation since 1904 with
major growth and expansion periods in the 1920's and late 1940's and
1950's. The recovery of aluminum from various forms of aluminum scrap
involves four rather distinct operations. These are:
1. Collection, sorting and transporting
2. Presmelting preparation
3. Charging, smelting, and refining
4. Pouring of the product line
* Much of this chapter is adapted from "Impact of Technology on the
Commercial Secondary Aluminum Industry," Donald L. Siebert, U.S.
Bureau of Mines 1C 8445, 1970.
III-l
-------
The last three operations vary somewhat throughout the industry, with re-
sultant variations in water usage and wastewater generation. The follow-
ing is a description of each operation listed.
1. Collection, Sorting and Transportation
The scrap raw material used by secondary smelters can be divided
into two categories, solids and residues. The solids are principally
metal and include borings and turnings, new clippings, castings, and
forgings, old castings and sheet and irony aluminum. Residues include
(1) dross and skimmings from melting operations at foundries, fabricators
and the primary aluminum industry and (2) slag formed during secondary
smelting operations.
Nearly 95 percent of the secondary smelting raw material containing
aluminum is supplied from scrap aluminum purchased from scrap dealers
and industrial plants. Classifications and chemical analyses of the
scrap have been specified by the Aluminum Smelters Research Institute
(ASRI), now the Aluminum Recycling Association. Table III-l gives the
ASRI classification.
A small portion of the secondary scrap supply is gathered by metal
collectors, or junk dealers, along with various other metals. These
collectors haul loads of mixed metals to scrap dealers, who segregate or
sort the scrap into various metals. Most often the dealer will have
accounts with various government agencies, aircraft firms, railroads, or
other aluminum scrap producers and acquire the metal directly.
The scrap used by the secondary smelters can be divided into five
main groups:
1. New clippings, forgings, and other solids
2. Borings and turnings
3. Residues (dross, slag, and skimmings)
4. Old castings and sheet
5. Sweated pig
New clippings, forgings, and other solids originate from manufacturing
plants. Borings and turnings are derived mainly from the machining of
castings, rods, and forgings by the aircraft and automobile industries.
Residues (dross, skimmings, and slag) originate from melting operations
at primary reduction plants, secondary smelting operations, casting
plants, and other foundries. Old castings and sheet may come from many
sources, as automobile parts, household items, and dismantled airplanes.
Miscellaneous high iron scrap requires special handling in sweating fur-
naces .
III-2
-------
TABLE III-l
A.S.R.I. ALUMINUM SCRAP CLASSIFICATIONS
1. NEW PURE ALUMINUM CLIPPINGS
2. NEW PURE ALUMINUM WIRE AND
CABLE
3. OLD PURE ALUMINUM WIRE AND
CABLE
4. SEGREGATED NEW ALUMINUM ALLOY
CLIPPINGS
5. MIXED NEW ALUMINUM ALLOY
CLIPPINGS
6. MIXED LOW COPPER ALUMINUM
ALLOY CLIPPINGS
7. SEGREGATED OLD ALUMINUM
ALLOY SHEET
8. MIXED OLD ALLOY SHEET
9. SCRAP SHEET AND SHEET UTENSIL
ALUMINUM
10. SEGREGATED NEW ALUMINUM CASTINGS,
FORCINGS, AND EXTRUSIONS
11. MIXED NEW ALUMINUM FORCINGS
AND EXTRUSIONS
12. MIXED NEW ALUMINUM CASTINGS
13. ALUMINUM AUTO CASTINGS
14. ALUMINUM AIRPLANE CASTINGS
15. MIXED ALUMINUM CASTINGS
16. ALUMINUM PISTONS
17. WRECKED AIRPLANE SHEET AND/OR
BREAKAGE ALUMINUM
18. NEW ALUMINUM FOIL
19. OLD ALUMINUM FOIL
20. ALL OTHER ALUMINUM BASE FOILS
INCLUDING ETCHED FOIL, RADAR
FOIL AND CHAFF
21. SEGREGATED ALUMINUM BORINGS AND
TURNINGS
22. MIXED ALUMINUM BORINGS AND TURNINGS
23. SWEATED ALUMINUM
24. ALUMINUM GRINDINGS
25. ALUMINUM DROSSES, SPATTERS, SPILLINGS,
SKIMMINGS AND SWEEPINGS
26. ALUMINUM HAIR WIRE
27. ALUMINUM WIRE SCREEN
28. COATED ALUMINUM (PAINTED OR PLASTIC
COATED, ETC.)
29. CONTAINERS OF ALL TYPES (OIL, FOOD,
BEVERAGE, AEROSOL)
30. ITEMS NOT COVERED SPECIFICALLY BY
ABOVE CLASSIFICATIONS
III-3
-------
The dealer sorts the collected aluminum scrap into groups of similar
composition. Sheet and extruded material are often baled into 3 x 6 ft.
bundles. Some dealers briquette borings and turnings for shipment. High
iron scrap may be treated by the dealer to concentrate the aluminum or he
may ship it directly to the smelter. In treatment, the high iron scrap
is heated to above 760°C (1400°F) in a sloping hearth furnace which is
direct-fired by natural gas (a "sweating furnace") . The aluminum melts,
flows away from the residual iron, and is cast into pigs ("sweated pigs")
or sows. In many cases the various types of scrap are shipped loose in
large tote boxes.
2. Presmelting Preparation
The presmelting preparation of scrap varies in accordance with the
type of scrap being handled. Some smelters do considerable preparation
to upgrade and segregate scrap. Those with more limited facilities by-
pass some of the preparation steps and rely upon the furnace to burn up
combustible contaminants. Here, contaminating metallics taken up into
the melt can be diluted with relatively pure scrap, while some free iron
can be raked from the furnace bottom.
New clippings and forgings are largely uncontaminated and require
little presmelter treatment other than sorting, either manual or mechani-
cally to remove obvious nonaluminum material. This scrap is stored in
tote boxes and charged directly into the furnace forewell.
Borings and turnings are often heavily contaminated with cutting
oils. In spite of this fact, some plants charge this material directly
into the forewell. Most, however, pretreat this material. Typically,
this material is received in long, intertwined pieces and must be crushed
in hammermills or ring crushers. The crushed material is then fed into
gas-or-oil-fired rotary dryers to remove cutting oils, grease, and mois-
ture. After drying, the material is screened for removal of fines, with
the oversize passing through a magnetic separator to remove tramp iron.
The undersize material would contribute excessive oxides if charged into
the furnace. It is often sold as pyrotechnics.
Residues (drosses, slags, skimmings, etc.) present a formidable pro-
cessing problem. In addition to 10 to 45 percent metallic aluminum, the
residues contain oxides, carbides, fluxing salts, and other contaminants.
To recover the metallic aluminum it is necessary to liberate it from
attachment to the contaminants. This can be done in either wet or dry
processes.
Most common is the process in which the material is crushed,in
hammermills, screened to remove the fines, and passed through a magnetic
separator to remove free iron. Large amounts of dust are created in this
circuit and provide a source of air pollution. Normally the dust emissions
are controlled by baghouses. Wet dust collection is done occasionally.
Ill- 4
-------
The dry residue, after aluminum removal, is piled on the plant site in
the open. Markets for the high alumina material exist and are being
developed but only for materials very low in soluble salt content.
Other plants process residues using wet techniques. Generally, the
raw material is crushed and fed into a long rotating drum. Water is
passed through the drum to wash the feed, carry away the fluxing salts and
chemicals, and liberate the aluminum. The washed material is then screened,
dried, and passed through a magnetic separator. The nonmagnetics are then
ready for the smelter. Fine particulates, dissolved salts, and screening
undersize are all sources of water pollution.
Because of additional equipment needed, the technical knowledge re-
quired, and specialized processing problems involved, the large scale
processing of residues is limited to larger smelters or specialty opera-
tions. Large smelters continually purchase residue products from small
smelters not equipped to process their own. Residue products are always
purchased on the basis of analysis and metal recovery.
In some plants sheet and castings may be charged directly into the
reverberatory forewell, as received. In most cases, these types of scrap
go to crushers which reduce them to small dimensions. The crushed material
is passed along vibrating screens to remove pulverized nonmetallics and
magnetic separators to remove free iron.
Aluminum scrap containing considerable amounts of iron is generally
pretreated to eliminate the iron. This may be done by crushing followed
by magnetic separation or, as is more commonly the case, the iron is re-
moved in a sweating furnace. The operation of the sweating furnace has
been previously described. Fumes from the furnace are generally passed
through an afterburner before being emitted to the atmosphere.
In summary of the various presmelter treatments employed, only the
wet processing of drosses and slags appears to provide a source of water
pollutants.
3. Smelting
Since the function of the secondary smelter is to remelt the scrap
material, remove the impurities, and produce a marketable specification
product, it is well to understand a fundamental chemical constraint. In
displacement reactions, only those elements that occupy positions above
aluminum in the electromotive series can be removed from the molten mix-
ture. Of the elements above aluminum in the series, only magnesium is
present in the scrap to any appreciable extent. Calcium and sodium might
be present in trace amounts, but their concentrations would be well below
specification limits and are generally removed if magnesium is removed.
Also lead can be removed with small additions of sodium.
III-5
-------
The only method for producing secondary aluminum alloys is to enrich
the less pure aluminum scrap with high-purity aluminum scrap or primary
aluminum. Only by diluting the contaminants can the molten metal be
brought to the desired specifications. Thus, manufacturing secondary
aluminum alloys is a blending process in which each element is brought
into specification by dilution and addition. This practice is in direct
contrast to primary alloy production where the specified elements are
added to pure aluminum to satisfy the alloy requirements. Dilution
chemistry, then, is the science practiced by the secondary smelters.
The reverberatory furnace is the workhorse of the smelting industry.
It is a rectangular furnace usually ranging in capacity from 30,000 to
180,000 Ibs. The furnace is direct fired to the molten bath and the
scrap is melted by the molten aluminum "heel", already present in the
furnace. The furnace fuel may be either natural gas or fuel oil and
from 2,000 to 4,000 Btu of input (depending upon scrap) is required to
melt a pound of aluminum alloy and bring it to a casting temperature.
Approximately 10 percent of the heat requirement is the latent heat of
fusion.
Although the reverberatory furnace is equipped with side doors for
charging heel material and cleaning, it is also equipped with a trough-
like feeder on the front called a "forewell". Because molten metal rises
to the same height in the forewell as in the furnace, charging scrap into
the forewell is made convenient. Rotary furnaces are also being used by
some companies and are successful in processing low-metallic raw materials.
The principal disadvantages of a rotary furnace are low capacity and un-
suitability for alloying and producing a homogeneous product. The princi-
pal advantages of a rotary furnace over a reverberatory furnace are the
hot fluxing of oxides and a mechanical mixing action.
Generally, the smelting of aluminum scrap with reverberatory fur-
naces consists more or less of seven operations or tasks. These are
charging scrap into the furnace, addition of fluxing agents, addition of
alloying agents, mixing, removal of magnesium (demagging), skimming and
degassing. Any given smelter may not necessarily incorporate all seven
steps, as demagging or addition of alloying agents in the case of deoxi-
dant producers, and may not follow the above order. There is some vari-
ability in the secondary aluminum industry as to precise techniques used
in each step.
Charging. The furnace or heat cycle begins with charging aluminum
scrap into the furnace, although this can vary depending upon whether the
furnace has been completely emptied from the previous heat. Many times
furnace operators leave from 9 to 16 inches of molten metal in the fur-
nace with which to start the next cycle. This is possible by tapping the
furnace to a measured level above the base. The molten metal remaining
is called a "heel" and it saves about 4 hours in the ordinary furnace
cycle. If a heel is not maintained in the furnace from heat to heat, the
cycle begins by charging heavy-aluminum heel material into the furnace.
Although the amount of heel material charged to the furnace depends upon
III-6
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furnace size, it is usually 20 percent of furnace capacity. This metal
must be completely melted, sampled, and skimmed before charging the fur-
nace can begin. While operating with a molten heel does considerably
shorten the furnace cycle, it also leaves behind in the furnace finished
metal that has incurred all costs except casting. The use of a heel often
depends upon the above factors as well as the availability of good heel
material, price and the composition of the next furnace heat. Large
smelters usually operate with a heel in the furnace, since they are often
producing the same specification ingot in continuing heats. This prac-
tice permits many economies because suitable heel material commands a
premium price when purchased.
A forklift truck or front-end loader is used to charge the furnace
with material selected from the five classes of scrap discussed earlier.
Sheet and cast material are usually added first. After this material has
been charged into the furnace, the slag is skimmed and the metal is sampled
to determine the composition of the melt. If necessary, silicon is added,
but caution is exercised to avoid exceeding the silicon solubility limit.
After the silicon content has been adjusted, copper is adjusted to speci-
fication. Copper is often introduced in the form of high-copper borings
and turnings or radiators that contain from 40 to 45 percent copper with
the balance aluminum.
It can take anywhere from 18 to 36 hours to charge a furnace to capa-
city depending on the size of the furnace and the scrap being charged.
Each charge must be followed by a control analysis to enable the furnace
operator to select the raw material for the next charge. Because the
furnace operator must know what he is adding to the furnace, it is vitally
important that raw materials be tagged with accurate analysis.
Although heavy scrap is fed into the furnace during the earlier
charging cycle, borings and turnings are frequently used after copper
and silicon adjustments have been made. As the furnace nears capacity,
it is charged with scrap whose analysis closely approximates that of the
desired final product. Final silicon and copper adjustments complete
the charging cycle. A melt may require a check of from 12 to 15 control
samples to reach specification metal.
Upon reaching specifications, either the magnesium must be removed
or the metal must be degassed before pouring, but not both. If the melt
is demagged, as a result, degassing is achieved at the same time. If it
does not need demagging, then the general practice is to degass it before
pouring. Any hardeners required by specifications are added at this time.
This final purification requires approximately 3-4 hours.
Fluxing. Because molten aluminum in the forewell oxidizes rapidly
when exposed to air, it must always be covered with a molten flux to re-
tard oxidation. Therefore, scrap material that is charged into the fore-
well of the furnace is "puddled" quickly into the molten metal where it
is shielded from oxidation by a layer of molten flux.
III-7
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Flux may be either a commercial grade or a specific salt mixture that
is desired by each individual smelter. The flux most commonly used is a
mixture of 47.5 percent NaCl, 47.5 percent KC1, and the remaining 5 per-
cent a fluoride bearing salt such as cryolite. Some smelters have reduced
the cryolite concentration to 3 percent or less of the flux. To minimize
their operating costs, many smelter operators mix their own fluxes. The
amount of flux used may vary but is approximately 1 Ib. of flux for each
pound of nonmetallics charged to the furnace.
Although the primary use of a flux is to lessen oxidation and gas
absorption, it also exerts a purifying action on the aluminum by clean-
ing the metal and removing dissolved gases. All solid fluxes are hygro-
scopic and must be kept dry. Any moisture introduced into the molten
metal causes hydrogen gas to be absorbed into the metal from the decom-
position of the water.
Despite the use of flux, oxidation and metal losses are still high
for finely divided scrap such as borings and turnings. Oxidation rates
increase with exposed surface area and finely divided scrap particles
cannot be economically melted because metal losses are too high. In
addition to high metal losses, the oxides formed are detrimental to the
molten metal since they are of approximately the same density as the mol-
ten aluminum alloys and, if not removed, are entrapped in the metal.
Aluminum oxide collecting on the sides of the furnace is exposed to
continuous high temperature and is converted into an extremely hard oxide.
This oxide, as well as other nonmetallic inclusions, will nick or even
break carbide and diamond tools and must be eliminated by fluxing. Fluxes
clean the molten metal by reacting with these unwanted contaminants as
they are brought to the surface. Once the oxide inclusions are entrapped
in the flux, they can be removed from the molten bath by skimming. The
oxides could be skimmed without fluxing but metal losses would be extremely
high.
Alloying. Alloying agents normally added to the aluminum melt in-
clude copper, silicon, magnesium, and zinc. Usually these are added after
the furnace has been charged with aluminum scrap and analyzed for its com-
position. The amounts of additions required to bring it up to specifica-
tions are then added usually as scrap high in the concentration of the
desired element or as in the case of silicon, added in the pure state.
These are added to the forewell and stirred into the melt with an inert
gas (N~) , or with mechanical and hydraulic puddlers although silicon is
generally added inside the furnace. The addition of the alloying agents
and the stirring produces no solid waste and only minor amounts of fumes
and dust that are removed from the working area by the hoods over the
forewell.
Mixing. Mixing of the metal to insure uniform composition and to
agitate the solvent fluxes into the melt is generally accomplished by in-
jecting nitrogen gas or by use of mechanical puddlers. Aside from homo-
genizing the melt, the mixing step is beneficial in bringing to the surface
III-8
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dissolved gases, such as hydrogen, and intermixed solids. Once on the
surface, the impurities combine with the fluxing agent and can be skimmed
off.
Mixing is performed nearly continuously in the reverberatory furnace.
Mixing often does a double duty and serves as a degassing operation. The
mixing operation employs no water and produces no solid wastes. Only
when the mixture of nitrogen and chlorine is used is there a source of air
pollution.
Magnesium Removal (demaggine). Scrap aluminum received by the
secondary smelters averages about 0.3 to 0.5 percent magnesium, while the
product line of alloys produced averages about 0.1 percent. Therefore,
after the furnace is fully charged and the melt brought up to the desired
chemical specification, it is usually necessary to remove the excess mag-
nesium. This is done with chlorine or chlorinating agents such as anhy-
drous aluminum chloride or chlorinated organics, or with aluminum fluoride,
Magnesium chloride or magnesium fluoride is formed and collected on top
of the molten melt. As the magnesium level is depleted, chlorine will
consume aluminum and the aluminum chloride or aluminum fluoride present
in excess volatilizes into the surrounding air and is a source of air
pollution.
Magnesium is the only metal removable from the alloy in this manner.
Other metal alloy levels must be adjusted by the addition of either more
aluminum dilution or more of the metal.
Chlorination, the method preferred by the industry for demagging is
performed at temperatures between 1475 and 1550°F. As a rule of thumb,
the reaction requires 3.5 - 4.0 Ibs. per pound of magnesium removed.
Chlorine gas is fed under pressure through tubes or lances to the bottom
of the melt. As it bubbles through the melt it reacts with magnesium and
aluminum to form chlorides which float to the melt surface where they com-
bine with the fluxing agents and are skimmed off. Because magnesium is
above aluminum in the electromotive series, aluminum chloride will be re-
duced by any available magnesium in the melt. At the beginning of the
demagging cycle, the principal reaction product is magnesium chloride.
As magnesium is removed and there is less available for reaction with
chlorine, the reaction of chlorine with aluminum becomes more signfleant,
the reduction of the aluminum chloride by magnesium becomes less likely,
and the production of aluminum chloride, a volatile compound becomes sig-
nificant. The aluminum chloride escapes and considerable fuming results
from the chlorination, making ventilation and air pollution equipment
necessary. Control of fumes is done by wet scrubbing and thus is a
source of water contamination.
Aluminum fluoride, as a demagging agent, reacts with the magnesium
to form magnesium fluoride which in turn combines with the flux on top
of the melt. Here it is skimmed off. In practice, about 3.5 to 4.3 Ibs.
of aluminum fluoride are required per pound of magnesium removed. The
III-9
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air contaminants exist as gaseous fluorides or as fluoride dusts and are
a source of air pollution. The fluorides are controlled by either dry
or wet methods. When done dry, a solid waste problem exists. When done
wet both a water pollution and solid waste pollution problem exist.
Some operators in the secondary industry are little concerned with
the magnesium content of their product, as the deoxidant manufacturers,
and they make no attempt at removing it. They thus do not contend with
the magnitude of fumes that the demaggers do and as a result do not re-
quire an extensive air pollution control equipment and related water
usage.
Skimming. The contaminated semisolid fluxing agent known as slag
(sometimes as dross) is removed from the surface of the melt in the fore-
well with a perforated ladle or similar device that permits molten metal
to drain back into the forewell. This is done as needed and also before
tapping the reverberatory furnace to pour. The slag is placed in pans
to cool or in a water-cooled "dross cooler".
Once cooled, the slag is either stored until shipped to a residue
processor, reprocessed by the company, or is dumped. If stored in the
open, it is a source of ground and runoff water contamination because
of contained soluble salts (NaCl, KC1, MgCl ). During slag cooling,
thermiting generates fumes and is a source of air pollution if the slag
is not properly conditioned and cooled. The thermiting, as well as
reactions in the smelting, produce nitrides and carbides of aluminum
which can react with water or water vapor in the air to release hydro-
carbons and ammonia to the atmosphere. The ammonia also may become a
component of water pollution.
Degassing. Molten aluminum will readily absorb hydrogen gas from
the atmosphere or other sources of moisture or water vapor. Since gases
dissolved in the metal will separate out during solidification, the
customer demands that the metal be gas free. If not, the entrapped gas
present in the metal would expand during fabrication and form blisters
or possibly interdendritic imperfections at the grain boundaries. Cast
products thus formed would have unusually high porosity from the absorbed
gases.
Because aluminum will hold hydrogen gas in solution in direct pro-
portion to the temperature of the molten metal, it is degassed at the
lowest possible temperature. It would do little good to degas the metal
and then raise the temperature of the molten metal to a higher level
where it could absorb more gas. Consequently, degasification is the
last operation before the molten metal is poured, if demagging is not
carried out. The temperature rise caused by exothermic reaction of the
chlorination process would destroy the effectiveness of degasification
if it were done in reversed sequence.
The metal is degasified by bubbling dry nitrogen, chlorine, or a
mixture of the two gases through the molten metal bath. Chlorine gas
111-10
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is far more effective since it degasses the metal chemically by form-
ing hydrogen chloride while nitrogen sweeps the gas out of the molten
metal mechanically. With few exceptions, any smelter equipped to use
chlorine does use chlorine.
Safety hazards involved in using and storing chlorine impose many
limitations upon its use. Fire departments in many large cities have
strict codes regarding how much chlorine can be stored around occupied
buildings. A small working supply of the chlorine is stored outside the
smelter in steel cylinders under heavy pressure and is piped into the
furnace as a liquid. The chlorine usually does not become a gas until
it enters the furnace. A carbon "lance" projecting into the molten
aluminum is used to introduce the elemental chlorine, and the gas
bubbling up through the metal bath cleans and degasses the metal.
The chlorine combines with hydrogen and aluminum in the furnace
according to the following equations:
2 Al + 3 C12 -> 2 A1C1 (1)
H2 + C12 "" 2 HC1 (2)
Unless smelters are equipped with adequate air pollution control sys-
tems, they are hampered by the severe fuming caused by the chlorine dur-
ing degassing. Because of this fuming and other hazards involved, few
smelters use elemental chlorine for degasification if they do not have
adequate ventilation and air pollution control equipment. Smelters
without this equipment commonly use nitrogen or some other inert gas.
4. Tapping the Furnace
Twenty-four to 42 hours after the furnace cycle is started, the
metal is ready for pouring. Charging the furnace, reaching specifica-
tion composition by blending, chlorinating the magnesium, and degassing
the metal are all time consuming. Even though furnaces are operated on
a continuous basis, each heat is a batch operation and is only a part
of a continuing series.
The melt is cooled to approximately 1,350°F for pouring. Low
pouring temperature, short metal launders, and preheated molds are all
helpful in minimizing hydrogen pickup from the atmosphere. The exact
pouring temperature and method of pouring, however, depend largely upon
the alloy and the product line of the individual smelter.
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5. Product Line
The product-lines of the secondary aluminum smelters have been
grouped into five categories. These are specification alloy ingots,
billets, hot metal, notched bar, and shot.
Specification Alloy Ingots. The most important product of the
secondary aluminum industry is specification alloy ingot to be used by
foundries for casting. Most smelters concentrate on a few of the basic
alloys. Normally, automatic casting methods are used to fill the ingot
molds. The molds are generally the 15 or 30-pound size.
Cooling is often accomplished with a water spray that contacts both
the molds and hot metal as they move along a conveyor track above a
casting pit. Cooling is also performed by a few companies by passing
water through passages in the mold, in which case water does not contact
the hot aluminum metal. In some cases, the molds are cooled by passing
the hot ingots through a cooling tunnel blown with a water mist-air
mixture, thus generating no wastewater.
The water used for cooling may be reclrculated or sent, to a cool-
ing Lower and recirculated, or it may be used only once arid discharged,
RecLrculaced water often builds up sludge in both the cooling tower and
cooling pit. This necessitates sludge removal at regular intervals and
Is accompanied by a discharge of system water.
Billets^ Secondary aluminum for use In the extrusion industry is
cast into 1000-pound billet Logs. The long cylindrical billets are 6
to 10 inches in diameter and about 10 feet long. The molds are arranged
in circular arrays. A riffle above each array splits the molten metal
into fractions so that all molds are filled simultaneously. Water lines
inside the molds cool the billets. Billets are water quenched on leav-
ing the mold. Each billet log is then removed and cut into shorter
2-foot sections. These "billets" are then placed in a homogenizing
furnace where they are given a high-temperature soaking treatment to
eliminate or reduce segregation by diffusion. This preheating treat-
ment provides the desired metallurgical structure and upon removal from
the homogenizing furnace, the billets are ready for shipment to extruders
who will form the billets into fabricated products such as storm doors,
window frames, etc.
Hot Metal. In some cases "hot metal" is tapped from the reverbera-
tory furnace into preheated portable crucibles. The crucibles are
sealed, placed on a flat bed truck and transported directly to the cus-
tomers for use. Presently, crucibles with capacities of 15,000 Ibs.
and 38,000 Ibs. are used.
Notched Bar_. Notched bar is used as a deoxldant by the Iron and
st^eL Industry and Ls normally cast in various 5 "Lb. shapes. Seven
[II- 12
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grades are produced, each grade having a different aluminum content.
Notched bar molds are cooled either with water sprays, internal water
lines, or with air. The water used may or may not be cooled and re-
circulated.
Shot. Shot is also used as a deoxidant and as an alloying element
and comes in various compositional grades. Shot is produced by pouring
the molten metal onto a vibrating feeder where perforated openings in
the bottom allow the molten metal to drop through into a water bath
below. The droplets solidify in the water, are dried, sized and packed
for shipment. The oversize shot is recharged into the furnaces.
Quenching water is sometimes sent to a cooling tower and recirculated.
Sludge build-up occurs and must be removed regularly on an annual or
semi-annual basis. Also, a low water temperature (about 65°F) is cri-
tical for the production of good quality shot.
C. RECENT TECHNOLOGICAL CHANGES*
The rapid growth of the secondary aluminum industry is best evi-
denced by the fact that secondary aluminum production increased by 110
percent between 1960 and 1966. During the same period primary aluminum
production increased by less than 50%. This rapid rate of growth would
indicate that the 60's were the real "takeoff" period for the secondary
aluminum industry. Although the secondary aluminum industry dates back
to the turn of the century, World War II acted as the catalyst for in-
dustry expansion. Before World War II there were only 25 smelters in
the United States, many of which were little more than remelters. Pro-
duction of secondary aluminum was 80,362 short tons in 1940 compared
with 693,031 short tons in 1966—an almost ninefold increase.
1. Scrap Processing
Only in the last few years has the scrap processing industry
reached its present state of sophistication. Until fairly recently,
aluminum scrap (discounting casting alloys) came in only three broad
classes: 2S, 3S, and 24S. As the metalworking industry became more
mature, however, a new alloy came to be developed for each specific
job. It was primarily the technology within the metalworking industry
that prompted the scrap dealer to become more knowledgeable about the
metals he handled. The decision by scrap dealers to sort scrap by
identifiable means and sell according to classification was purely
economic. When a mixed load of aluminum scrap will command only the
price of the poorest aluminum scrap portion, many potential profits
*Much of this chapter is adapted from "Impact of Technology on the
Commercial Secondary Aluminum Industry," Donald L. Siebert, U.S. Bureau
of Mines 1C 8445, 1970.
Ill- 13
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are sacrificed. Economic rewards are maximized when the different
classes of scrap are segregated into shipments of salable scrap.
Dealers have become aware of the harmful effects that contaminants
such as zinc or stainless steel have on aluminum smelting and have made
an extra effort to remove them from scrap shipments. Venetian blinds,
painted materials, screen, and neoprene-coated materials are also diffi-
cult for a smelter operator to process and may cause emission of poly-
chlorinated biphenyl compounds and other complex organics. Aluminum
foil, although a high-grade aluminum product (2S) , creates a problem
for the smelter because metal losses from oxidation are extremely high.
Paper-back foil is impractical for processing in the reverberatory fur-
nace since it burns readily. Any raw material containing carbonaceous
or flammable material is undesirable for smelting since the aluminum
oxidizes and the combustibles burn to ash. It might be possible to
reclaim this material by first charring the material in a controlled
atmosphere and gradually increasing the temperature until the aluminum
coalesced into tiny nodules. The coalesced aluminum could then be
separated from the carbonaceous material by screening or washing.
2. Smelting
There has been no appreciable change in smelter metallurgy for over
20 years. While it is true that hundreds of compositions of wrought
and casting alloys have been developed during this period, the metallurgy
has remained basically unchanged. Like the scrap dealer, the smelter
has also developed remarkable technological improvements in materials
handling and preparing scrap for the furnace. These improvements would
not have come about had the smelting industry not been ripe for change.
In the early 50"s many smelters continued to move both raw materials
and finished products by hand labor. Family-owned smelters often main-
tained such a cloak of secrecy around their organizations that even
equipment companies were not permitted within the plant £or fear that
processing secrets would be discovered and passed on to competitors.
Smelters either built their own equipment or purchased equipment and
installed it with their own manpower. There was little exchange of
information, and plant visits between smelter operators were unheard of.
Indirectly, a competitor determined product price since each smelter
operator would match a competitor's price regardless of unit production
costs. The net effect was that although the industry grew, technology
stagnated and profits were erratic.
Paradoxically, it was the rapid growth of the secondary industry
that forced smelter operators out of these parochial practices. Many
organizations brought in engineers and professional managers for the
first time. Professional managers regarded the smelter as a manufac-
turing company Instead of a family business. Unaffected by close
family ties, the professional cadre focused their efforts upon the
perpetuation of the company. Cost accounting was introduced to determine
III- 14
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the unit cost of each operation. This enabled management to focus on
high cost operations and to introduce appropriate cost cutting proce-
dures. Labor was found to be an extremely expensive reagent, and
wherever possible, mechanization and even automation were introduced.
Long-range planning became commonplace and the company discontinued
operating under a short-term family objective to produce an "acceptable"
profit. Professionalism took over and modernized the organization by
making commonplace technical knowledge, marketing strategy, and mana-
gerial competency.
Most of the technology to emerge from secondary aluminum smelting
had its birth after the smelter assumed the professional posture just
described. The need for technological innovation is especially impor-
tant to the secondary smelters because the raw materials with which
they must work are constantly changing. Painted siding, beverage con-
tainers, and other consumer products that are being manufactured for
today's household have already entered the raw materials inventory.
Since secondary industries have no choice of the raw materials they
must handle, they must learn to process whatever becomes available.
In addition to the broad categories of improved material handling
methods, increased manpower utilization (higher productivity), and more
sophisticated approaches to quality control, the secondary smelters have
had to develop a number of specific practices. A summary of the most
important of these technological innovations to emerge from the secon-
dary smelter is as follows:
1. Improvements in the processing of raw materials
2. The tremendous increase in furnace capacity
3. The salvaging of drosses and skimmings
4. Shipment of hot metal
5. Quality control
6. Air pollution control
7. Nitrogen "agitation," mechanical and hydraulic "puddlers,"
and molten metal recycle pump
D. INDUSTRY SEGMENTS
Segmentation of the secondary aluminum industry presents an ex-
tremely difficult task for a number of reasons. Oftentimes it is
questionable as to which segmentation scheme best fits the particular
industry. Also, plants in each segment may be alike in terms of the
segmentation scheme used but may differ from each other in other respects.
Ill- 15
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In addition, it may be difficult to obtain enough information on a par-
ticular plant to determine in which segment it would best fit. Each
approach therefore has its own limitations and the best solution is to
find a scheme which best characterizes the industry. Ideally, the best
analysis would be on a plant-by-plant basis, but unfortunately, this
may not be possible due to such limitations as time and budget available.
1. Segmentation of the Industry
It seems best to segment the industry into groups of plants which
may have similar processing problems. The most effective way of accom-
plishing this is to classify each plant as to the major raw material
input and the final product produced since these two factors combined
determine the process or processes to be used. In turn, the process
used determines the ultimate water use.
Once the industry has been segmented in this manner, each segment
can then be subdivided into large and small plants. This further division
will be helpful in determining capital availability in each segment.
We have arbitrarily chosen the break point between small and large
smelters at the level of 50,000 Ibs. per day of finished product produc-
tion. This is equivalent to approximately 1 million Ibs./month.
Following the argument presented, we have classified the U.S.
secondary aluminum smelters into six segments in terms of size (amount
of product produced), type of product, and major raw material input.
These segments are:
1. large, ingot producers using drosses as a major portion of
their raw material input
2. small, ingot producers using drosses as a major portion of
their raw material input
3. large, ingot producers using scrap aluminum
4. small, ingot producers using scrap aluminum
5. large, billet, plate and sheet manufacturers using scrap for
their major raw material input
6. small, billet, plate and sheet producers using scrap for their
major raw material input
Previous information gathered by Battelle for the EPA indicates
that there are approximately 85 secondary smelters in the billet and
ingot manufacturing industries. In addition to, these listed there are
operations which are integrated within manufacturing activities such as
111-16
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the sheet makers and extruders who produce an end product, bringing the
total to more than 100. Of these 100 or more plants, we have reasonably
complete information on 69 of the largest (Table III-2) which represent
in excess of 94 percent of the total production and 90 percent of the
total employment in the U.S. secondary aluminum smelting industry. These
69 plants will therefore be the subject of this impact study and will be
analyzed for possible impact according to the above proposed segmentation.
2. Types of Firms
A vast majority of the firms have one plant operation and are either
family-owned or owned by small corporations. A minority in number, but
which represent a large portion of the production, are either large cor-
porations or subsidiaries of large corporations. On a company basis, the
two largest companies presently supply 30 percent of the secondary aluminum
produced. The next four largest companies supply another 30 percent,
or 60 percent of product is by the six largest companies.
Data is also available from the Bureau of the Census dealing with the
value of shipments in 1963 and 1967 and is presented in Table III-3.
The production and value of shipments information combined provide an
indication of how much the secondary aluminum smelting industry is dominated
by large companies.
The size of a firm may range from six employees, in the case of a
small family-owned company with only one plant, up to five or six thousand
employees, in the case of a conglomerate with several plants with only a
portion of the employment due to secondary aluminum smelting.
The level of integration in these firms is low, with the exception
of some of the billet manufacturers who do produce siding, doors, windows,
and other marketable products. Most smelters buy aluminum scrap from scrap
collectors refine the aluminum scrap to produce metallic aluminum alloys,
and then sell these alloys, mainly in the form of ingots, hot metal and
billets, to users who shape the alloy into a finished produce. On the whole,
the particular function of a secondary aluminum smelter is to transform
a relatively low-value aluminum scrap, which would otherwise be wasted
into a specification alloy which can be further processed into a useful
product. The general product of this industry is in the form of either
15 or 30 Ib. ingots or 500,600,800 and 1,000 Ib. sows. These are generally
in specification alloys and are mainly used for die casting and to a lesser
extent for permanent mold and sand casting. Many smelters manufacture a
wide variety of these alloys. Some of the smelters also produce a semi-
specification material for use in steel mills as de-oxiders. The de-
oxidizers may be in the form of small ingot, notched bar, shot, and certain
other special shapes.
111-17
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TABLE III-2
SECONDARY ALUMINUM SMELTERS
COMPANY
Aetna
Allied Metal
Alsco
Alside
Aluminum & Magnesium, Inc.
Aluminum & Magnesium, Inc.
Aluminum & Magnesium, Inc.
Aluminum & Magnesium, Inc.
Aluminum Smelting & Refining Co., Inc.
Apex Smelting Co., Division of Amax
Aluminum Co.
Apex Smelting Co.
Apex Smelting Co.
Alia;,tic Metals Corp.
Aur- r i Refining Co.
banre:. Industries
i. ii.:,! i Industries
:. i! . i-s Batchelder Co.
:>.'iL, ,'elder-Bias I us , Inc..
B iv '• i 1 iels , Inc.
J ,e :: Bt-hr
hri: .„ Br.'s. Iron & Metal Co., Inc.
Hi>lni A IUE; I num
Brad ey Metals
W..I. Bullock, Luc.
ljnn.il'1 Carroll
vJlev^laiul Electro Metals
Cruwii Aluminum
Divt-rsif Led Metals Corp.
J.R. Klkings, Inc.
Excel Smelting Corp.
Fruehauf Corp.
Garfield
Globe
Gulf Reduction Corp.
LOCATION
Los Angeles, California
Chicago, Illinois
Akron, Ohio
Akron, Ohio
Hot Springs, Arkansas
Corona, California
Oak Creek, Wisconsin
Sandusky, Ohio
Maple Heights, Ohio
Chicago, Illinois
Cleveland, Ohio
Long Beach, California
Philadelphia, Pennsylvania
Aurora, Illinois
Akron, Ohio
Uhrichville, Ohio
Botsford, Connecticut
Spartenburg, South Carolina
Sandusky, Ohio
Rockford, Illinois
N. Birmingham, Alabama
Southfield, Michigan
Cleveland, Ohio
Fairfield, Alabtma
Bensenvllle, Illinois
Cleveland, Ohio
Roxboro, North Carolina
Livia, Kentucky
Brooklyn, New York
Memphis, Tennessee
Decatur, Alabama
Cleveland, Ohio
Oakland, California
Houston, Texas
111-18
-------
TABLE III-2 (Cont'd.)
COMPANY
LOCATION
Hall Aluminum Co.
Harco Aluminum Co.
Hillyard
Hy-Duty Alloy
Intercontinental Alloy
W.F. Jobbins (Subsidiary of U.S. Reduction)
Kimerling & Sons
R. Lavin & Sons, Inc.
Lissner
Lupton
Materials Reclamation Co., Inc.
McGowan Metal
Michigan Standard Alloys
Newark Processors
North American Smelting Company
Ohio Valley Aluminum Co.
Pioneer Metals, Inc.
Robert Russell, Metals Division
Rochester Smelting & Refining Co., Inc.
Roth Smelting Company
The George Sail Metals Co., Inc.
Seattle Iron and Metal
S-G Metals Industries, Inc.
Southwire Co.
S & S Supply
Tomke Aluminum
United States Aluminum Corp. of Pennsylvania
U.S. Reduction Co.
U.S. Reduction Co.
U.S. Reduction Co.
U.S. Reduction Co.
U.S. Reduction, Federal Metals Division
Vista Metals
Wabash Smelting, Inc.
Wabash Smelting, Inc.
111-19
Chicago Heights, Illinois
Chicago, Illinois
Spokane, Washington
Seattle, Washington
Joliet, Illinois
Aurora, Illinois
Birmingham, Alabama
Chicago, Illinois
Chicago, Illinois
Philadelphia & L.A.
Seattle, Washington
Ontario, California
Benton Harbor, Michigan
Newark, Ohio
Wilmington, Delaware
Shelbyville, Kentucky
Los Angeles, California
Miami, Florida
Rochester, New York
Syracuse, New York
Philadelphia, Pennsylvania
Seattle, Washington
Kansas City, Kansas
Carrollton, Georgia
Fontana, California
Baltimore, Maryland
Marietta, Pennsylvania
East Chicago, Illinois
Russellville, Alabama
Toledo, Ohio
Ontario, California
Alton, Illinois
Ontario, California
Wabash, Indiana
Cleveland, Ohio
-------
TABLE III-3
PERCENT OF VALUE OF SHIPMENTS OF INGOTS AND BILLETS
ACCOUNTED FOR BY THE LARGEST COMPANIES 1963 AND 1967
Total 4 8 20 50
(million) Largest Largest Largest Largest
Product Year Dollars Companies Companies Companies Companies
Ingot 1963 238.9 44 62 85 99
1967 302.9 44 64 88 99+
Billet 1963 13.9 85 99 100 100
1967 39.3 72 97 100 100
SOURCE: U.S. Bureau of the Census, 1967,
111-20
-------
Further, a small segment of this industry consumes aluminum for the
manufacture of extrusion billets. In this case the input is almost ex-
clusively billet grade scrap which is remelted and then cast into the
billets. Some, if not most, of the billet manufacturers also manufacture
semi-finished and finished products such as extrusions and building construc-
tion items such as doors, windows, storm doors, etc.
With the exception of those which are owned by conglomerates, the level
of diversification of most of these companies is low. There are a few
singular exceptions where the facility not only produces secondary
aluminum but handles brass, precious metals and other completely unrelated
materials such as building products, carries out steel warehousing and
other miscellaneous activities.
3. Types of Plants
Plants in this industry vary all the way from very small operations
located on sites as small as one acre and employing as few as six people
to fairly complex ones with on the order of 400 employees at a given site,
occupying up to 50 acres. At the same time, production of aluminum
alloy can range from 500,000 pounds per month up to 9 million pounds
per month from a single plant. The production at each plant can vary
significantly. Unlike primary aluminum plants, secondary smelters do
not operate around the clock for seven days. They may operate contin-
uously five days a week and thus can step up production by operating
operating extra shifts. There is not necessarily a relationship between
either employment and site area or production and site area of a plant.
This is noted from the fact that several very large producers in metro-
politan areas have small plant sites due to the high cost of land.
Plants in this Industry vary in age with some of the facilities 40
to 50 years old with additions having been made over the years and in
some cases being currently made. Due to the unsophisticated nature of
this industry, there is little need for extensive reliance on the build-
ings themselves to do anything more than shield from the weather, thus
any safe structure can be utilized.
Most of the plants currently producing secondary aluminum metal
are located near heavily industrialized areas which give them proximity
to a supply of scrap as well as to their customers (see Figure III-l).
There is no need for them to be near plentiful supplies of electrical
power and water as in the case of primary aluminum smelters. Most of
these plants are located in the Midwest, in or near the Chicago and
Cleveland metropolitan areas and in the West, in the Los Angeles area.
The Chicago metropolitan area alone produces almost 28 million pounds
per month from 10 plants which represents about 18% of the total produc-
tion from the 69 plants represented in this report. In addition, within
111-21
-------
AA A
A
A *
to
to
A
A
Sources: 1. Siebert, Donald L., Impact of Technology on the Commercial Secondary
Aluminum Industry, U.S. Bureau of Mines, 1C 8445, 1970.
2. Arthur D. Little, Inc., information
FIGURE ltl-1 GEOGRAPHIC DISTRIBUTION OF SECONDARY ALUMINUM SMELTERS IN THE UNITED STATES
-------
a 100-mile radius of downtown Chicago, approximately 45% of the U.S.
secondary aluminum production can be accounted for. Within a similar
radius of Cleveland, another 20% can be found. The East Coast has plants
located near the New York City-Philadelphia area. There are none in the
Rocky Mountain states.
Most facilities are generally operating at relatively low technological
levels. Techniques for smelting have not changed basically in the last
40 years, although furnaces today are much larger and are equipped with
much greater heat input capability, thus are able to generate more output
per man-hour. Techniques for preparation of scrap by means of crushers
and sorting are reasonably general. Preparation of turnings by crushing
and drying is carried out in most plants. Dross processing is carried
out by and large by companies who specialize in the processing. Most of
their competitors either sell their skimmings to the dross processors or
dump them.
The general efficiency of these plants is low in terms of technology and
energy utilization (fuel, electric, and human) as compared to other manu-
facturing industries. Heat recoveries from the furnaces are low and many
operations which could be automated are still accomplished by manual labor.
By and large the reason that it is possible for new companies to enter
the business as readily as they can lies in the fact that the general
level of operations are reasonably labor intensive and are not capital
intensive. This further tends to indicate the lack of high level techno-
logy in the operation of this industry.
About the only exception that might be noted lies in the dry processing
of drosses where sophistication has improved the processing to a level
where enormous tonnages of material, if they are available, can be pro-
cessed at relatively low costs, thus making this an attractive material.
Further, the level of mechanical auxiliaries and automated equipment
is relatively low in this industry. As an example, very few plants have
completely automated pouring and stacking equipment for handling their
aluminum alloy ingots. A relatively small number of plants in the industry
have mechanical puddling devices available to assist manpower in the pudd-
ling of scrap into the furnaces.
As with the firms, in general, the plants are not integrated to any
great extent with the same exceptions as those which applied to the firms.
4. Percent of Industry Represented by Each Segment
Table III-4 presents a breakdown of production and numbers of plants
and employees represented by each segment. Also presented are the per-
centages of total industry represented by each.
111-23
-------
TABLE III-4
PLANTS. EMPLOYEES. AND PRODUCTION AND PERCENTS
Segment^
1
2
3
4
5
6
Totals
OF INDUSTRY TOTALS REPRESENTED BY EACH SEGMENT
PLANTS
Number
10
6
24
19
9
1
69
Percent of1
Industry
10
6
24
19
9
1
69
EMPLOYEES
Number
1200
140
2500
770
450
20
5080
Percent of1
Industry
22
3
44
13
8
*\
90
PRODUCTION
Millions of
Pounds/Month
38.4
4.4
71.0
15.3
25.0
0.7
154.8
Percent of1
Industry
23
3
43
9
15
0.5
94
1. Percentages may not add due to independent rounding
2. Segments
1. - large, ingot producers using drosses
2. - small, ingot producers using drosses
3. - large, ingot producers using scrap aluminum
4. - small, ingot producers using scrap aluminum
5. - large, billet, plate and sheet manufactueres using scrap aluminum
6. - small, billet, plate and sheet producers using scrap aluminum
SOURCE: ADL Estimates
111-24
-------
The large producers of ingot using scrap aluminum as a raw material,
segment 3, represent by far the largest share of total industry in all
three areas. Next, in number of employees and production, are the large
producers of ingot using drosses as a raw material input, segment 1.
E. FINANCIAL PROFILES
In view of the fact that most of the plants are either privately
held or are subsidiary operations of conglomerates, it is impossible
to establish annual profits, cash flows or cost structures.
Only one company is publicly held where figures are available.
Since this company does not represent average conditions within the
industry, it would be inappropriate to use these figures to establish
industry-wide trends.
We have utilized the most recent data on the secondary aluminum
smelting industry, as developed in the 1967 Census of Manufacturers
for an assessment of the financial profiles of the industry. Data for
the 1972 Census is not expected to be available until late 1974.
The 1967 Census data provides the following financial information
on the industry:
• Value of shipments (VS) represents the net selling values, f.o.b.
plant, after discounts and allowances and excluding freight charges
and excise taxes.
• Cost of materials includes:
a. the total delivered cost of all raw materials, semifinished
goods, parts, components, containers, scrap, and supplies
consumed or put into production,
b. the amount paid for electric energy purchased;
c. the amount paid for all fuels consumer for heat, power or the
generation of electricity;
d. the cost of work done by others on materials or parts furnished
by the reporting establishment (contract work); and
e. the cost of products bought and resold in the same condition.
• Capital expenditures include the cost of plant and equipment for
replacement purposes, as well as for additions to productive
capacity. Costs associated with plants under construction but
111-25
-------
not in operation during the year are also included. Capital
expenditures do not include plant and equipment furnished to
the manufacturer without charge by governmental or private
organizations. The value of rented facilities is also excluded.
• Payrolls - This total includes the gross earnings paid in the calendar
year 1967 to all employees on the payroll of reported establish-
ments. It follows the definition of payrolls used for calculating
the Federal withholding tax. It includes all forms of compen-
sation such as salaries, wages, commissions, dismissal pay,
all bonuses, vacation and sick leave pay, and compensation in
kind. It should be noted that this definition does not include
employers' Social Security contributions or other non-payroll
labor costs such as Employees' pension plans, group insurance
premiums, and workmen's compensation.
• Value added by manufacture - This figure is derived by subtracting
the total cost of materials (including materials, supplies, fuel,
electric energy, cost of resales and contract work done by others)
from the value of shipments including resales, and other receipts
and adjusting the resulting amount by the net change in finished
products and work-in-process inventories between the beginning
and end of the year.
These data can be utilized to derive the following information shown
in Table III-5.
• Value Added (VA) /Value of Shipments (VS)
Since the value of shipments is a measure of tonnage produced
by each segment, this is equivalent to value added per ton.
• VA - payroll (incl. suppl. expenses)/VS
If local taxes, insurance and interest charges are subtracted from
this column, we obtain an estimate of pretax cash flow per ton.
• Capital expenditures (CI)/VS
This is an estimate of the average rate of capital investment
per ton of production.
• Variable out-of-pocket costs (CV)/VS
CV is equal to cost of materials plus payroll (including supplemental
expenses such as welfare and social security contributions). When
divided by value of shipments, this gives the out-of-pocket variable
costs per ton.
111-26
-------
TABLE III-5
MEASURES OF FINANCIAL PERFORMANCE OF SECONDARY ALUMINUM INDUSTRY SMELTING INDUSTRY1
BASED ON 1967 BUREAU OF CENSUS DATA
VA3 VA-Payroll3 CI3 CV3
Payroll2 Materials2 VA2 VS2 CI2 VS VS VS VS
37.5 326.6 81.1 409.4 9.4 0.20 0.11 0.02 0.89
H Note: VA = Value added by Manufacture
M
NJ VS = Value of Shipments
•vj
CI = Capital Expenditure
CV = Variable out-of-pocket costs
See text for interpretation of the ratios derived
1. Includes numbers for both ingot and billet producers since the data do not reveal any significant
differences between these categories.
2. Million dollars
3. Ratio of $/$
SOURCE: 1967 Census of Manufacturers
-------
Interpretation of Ratios
VA/VS - A low ratio indicates that the difference between the value
of the raw material used and that of the product produced is
small.
CI/VS - A low ratio shows that there is not much capital investment
or perhaps it consists of used equipment installed by in-house
labor costs and that most capital expenditures are paid for
via retained income without the use of long-term financing.
It may also indicate a tendency to write off as current
expenses what are really capital items.
CV/VS - A high ratio means low fixed charges, i.e. low book value
of assets; depreciation is low; small long-term debt.
1. Profits
Net profit on sales for secondary aluminum smelters range from 1 to
2.5 percent. While some smelters list profits as low as 1 to 1.5 percent,
most smelters consider a 2 percent profit on sales as standard.
2. Annual Cash Flow
Again annual cash flows are very difficult to determine since the
company figures are not made public. Transactions in the secondary
smelting industry are complicated and can change dramatically from
month-to-month and even day-to-day.
Secondary smelters usually pay up to 75 percent of the purchase price
of scrap in cash at the time of confirmation of shipment and the balance
in 30 days. Consequently the cash prepayment for each railroad car of
scrap will be approximately $5,000, and It may be days or even weeks before
the scrap arrives at the smelter. In the meantime, smelter products are
always sold on credit with payment required in 30, 60, or 90 days. Thus,
a secondary smelter generally buys for cash and sells on loan credit.
This financial arrangement generates a tremendous need for liquid capital
and has been a powerful motivation in convincing the small family-owned
smelter operators to either merge or go public.
The inventory of aluminum scrap that each smultur strives Lu maintain
is determined by si_rup availability, storage rapacity, ,u.-l -iper-it iug • ii;li
on hand. Since aluminum Is a li^lit metal and the s< rap luiter 1-iL in Nf ky,
large volumes uf stoiaef- space aru required. Whili1 .some siue! r. i:r'r;r, others --p.-iat. ,vLih as- !i:tli
Hl-28
-------
as a 2-day supply. A normal scrap inventory, however, is about a 2-week
supply of scrap. Smelters operating with a small inventory can influence
local prices when in danger of running out of scrap. When scrap does not
arrive at the smelter on schedule, the operator must buy quickly from a
local supplier by offering a premium price. This practice can—and often
does—raise general scrap prices within the area.
3. Market Value of Assets
The market value of the assets of any of these plants is quite lov
unless the plant can be maintained as an operating unit. In general, the
industry has been fairly negligent in the maintenance and upkeep of their
facilities. Much of the equipment is single purpose equipment incapable
of being utilized for any other purpose. On this basis, it is our estimate
that these plants would have value somewhat less than the local land costs
since the land values would have to be depressed by the cost of clearing
up the sites. On the other hand, if the plant can be turned over to
another operator who is able to operate it, the value can be substantially
higher than this.
In one recent case, a large conglomerate shut down a smelting pland and
was able to recover approximately 25% of book value on selling it to another
smelter. In a case three years ago, another conglomerate shut down a plant
they were unable to sell as a going operation and were able to salvage
between 2 and 3 cents on the book value dollar.
4. Cost Structure
Cost sturctures vary dramatically in the industry depending on the type
of scrap being utilized and the volume of operation. As an example, a
plant utilizing a high percentage of dross metallics will have considerably
higher operating costs, especially higher energy requirements. However,
the cost of the drosses will be sufficiently low enough to offset these
higher operation costs and return a better than average profit much of
the time.
Typically the industry allocates approximately 5 l/2c to 60 per Ib.
for the cost of processing aluminum scrap into ingot (on a finished
weight basis). The distribution of costs between fixed, such as rent,
taxes, commercial and sales expenses and variables such as labor, fuel,
fluxes, refractories, maintenance, will split up so that the essentially
fixed costs are 2 l/2c of the 5 l/2<:. The variable costs are approximately
3
-------
In general, the commercial expenses in the industry, except for
the smallest plants, are quite similar. In the case of the small plants,
they tend to be somewhat less since the plant owner often will be selling
relatively small quantities of material locally, reducing his sales
expenses, possibly even completely eliminating his need for a sales
force. Since many of these small plants are operated by "graduates" from
the scrap industry, they have excellent commercial contacts and minimize
their buying expenses to an extent that the larger companies cannot do.
5. Constraints on Financing Additional Capital
The general constraints on financing relate to the dollars needed
for a particular project. The larger companies with a number of claims
on their capital dollars from many divisions have been reluctant in the
past several years to lay out large sums of money for plant improvements,
pollution controls, etc. On the other hand, many of the small companies
with close ownership have been able to find the capital to make at least
minimal improvements, though most capital expenditures are paid for via
retained income without the use of long-term financing (see Table III-5).
The small companies tend to do things on a less formalistic basis and
tend to do a lot of "horseback" engineering and are adept at acquiring
information and technology without great expense. These people have
oftentimes been able to home-make quite capable machinery which would have
cost several times its acquired cost if it had been purchased from normal
commercial sources or if it had been engineered to their specific require-
ments.
As an example, in one large company owned by a conglomerate, a single
furnace has almost $200,000 worth of air pollution control equipment on it
involving afterburners and a scrubber. In another company where a sophis-
ticated scrubber is used in conjunction with a baghouse system the unit
cost for a single furnace is approximately $150,000. At the present time,
a new small smelter is under construction, where the total cost of a
sophisticated scrubber and a baghouse control will be accomplished fur
less than $40,000. It thus becomes obvious that constraints on capital
availability vary within broad parameters relative to the flexibility and
capability of the company.
There is little relationship between the price of primary ingot and
secondary ingot in the long run. Since price is largely determined by the
excess supply or the excess demand for each particular metal in the short-
term or even anticipations of a supply/demand imbalance, the prices fluct-
uate and periodically cross. During the time in which an aluminum shortage
exists, the result is an increase in the price of scrap. This, in turn,
results in the primaries taking back their customers' scrap, thus causing
more of a decrease in the scrap supply. This "snowball effect" thus
111-30
-------
pushes the price of secondary casting alloy above that of the primary
alloy. Historically, this does not happen very often. In general, the
price of secondary alloy ingot is 15 to 20 percent below that of primary
ingot of the same alloy. There is a wide disparity between artificial
or paper prices found in publications and the actual or market prices
that exist. Unlike aluminum scrap prices, however, market prices for
secondary aluminum ingot are lower than quoted prices. In the late
1968, for example, 380 alloy was quoted in the American Metal Market
as selling for 25 to 26 cents per Ib. Selling price for 380 alloy on
the east coast at that time was 22 to 22 1/2 cents per Ib. Normally,
the selling price for secondary aluminum ingot is higher in the Midwest
than in any other region of the United States. Chicago prices for stand-
ard casting alloys are usually 1/2 cents per Ib. higher than east coast
prices and 1/2 cents per Ib. higher than west coast prices.
F. IMPACT ANALYSIS
The purpose of this analysis is to assess the economic impact of
the guidelines proposed by the Effluent Guideline Development Document
for the secondary aluminum smelting industry. These guidelines are:
1. Proposed Best Practicable Technology (B.P.T.) - to be met
by industrial dischargers by 1977.
2. Proposed Best Available Technology (B.A.T.) - to be met by
1983.
3. Proposed New Source Performance Standards (N.S.P.S.) - to be
applied to all new facilities (that discharge directly to
navigable waters) constructed after the promulgation of these
guidelines (approximately January 1, 1974).
The types of discharges regulated by the Effluent Guideline Develop-
ment Document are waters from:
1. wet scrubbing of fumes
2. wet milling of residues
3. metal cooling
Recommendations for B.P.T., proposed by the Effluent Guideline
Development Document, are shown in Tables III-6 and III-7. These
recommendations regulate the quality of water discharged from chloride
fume wet scrubbing and from wet milling of residues, respectively. The
recommendation for B.P.T. with regard to metal cooling water and water
111-31
-------
TABLE II1-6
RECOMMENDED EFFLUENT LIMITATIONS FOR
FUME SCRUBBER WASTEWATER GENERATED DURING
CHLORINE DEMAGGING TO BE ACHIEVED BY
JULY 1, 1977, BASED ON THE BEST PRACTICABLE
CONTROL TECHNOLOGY CURRENTLY AVAILABLE
Parameter
Total Suspended Solids
Oil and Grease
Chemical Oxygen Demand
nH
Effluent Limitation
(Ib./lOOO Ib. of Magnesium Removed)
175
2
6.5
7.5 - 8.5
SOURCE: Effluent Guideline Development Document
111-32
-------
TABLE III-7
RECOMMENDED EFFLUENT LIMITATIONS FOR
WASTEWATER FROM RESIDUE MILLING TO BE
ACHIEVED BY JULY 1, 1977, BASED ON THE
BEST PRACTICABLE CONTROL TECHNOLOGY
CURRENTLY AVAILABLE
Parameter
Total Suspended Solids
Fluoride
Ammonia
Aluminum
Copper
Chemical Oxygen Demand
Effluent Limitation
(Ib./lOOO Ib. of product)
1.5
0.4
0.01
1.0
0.003
1.0
-.H
7.5 - 9.0
SOURCE: Effluent Guideline Development" Document
111-33
-------
from fluoride fume scrubbing is "no discharge" of water.
B.A.T. recommendations are "no discharge of pollutants to navigable
waters" for all three types of discharge.
In addition, it is recommended that the standard of performance for
new sources (N.S.P.S.) be such that there is "no discharge of pollutants
to navigable waters" from metal cooling and residue milling operations.
It is recommended that the discharge of fume scrubbing wastewater from
new sources be limited to those presented in Table III-6 for facilities
using chlorine for demagging and to "no discharge" of scrubber wastewater
for those using aluminum trifluoride for demagging.
1. Approach
The most realistic assessment of economic impact of pollution control
regulations on an industry is based on a plant-by-plant and company-by-
company basis. In the current study, time and budgetary considerations
did not permit such an approach nor were incremental cost data available
for each plant in the industry. Hence, the approach for the economic
impact analysis was two-fold. Based on knowledge of the industry and
technical considerations, the industry was divided into six segments,
as discussed earlier, and attention was focussed on the segments with
the highest incremental cost of pollution control. Based on the financial
data (credit ratings, debt repayment history, net worth, etc.) on indivi-
dual companies, an assessment was made of their capability to undertake
significant capital investment.
2. Costs
The costs for conforming with the proposed regulations were provided
by the Effluent Guideline Development Document and the Environmental
Protection Agency (EPA) and are shown in Table III-8. The costs presented
were examined enough to show that they are reasonable, hut available time
and budget did not permit a detailed analysis of the ^osis. Also, costs
per pound of product will vary slightly with the siz<^ of the plant and
amount of water being treated.
3. Impacted Segments
Table 111-9 presents a de.s. rlptioa of tLf. se^iue.ntai l-m tueth.iu UK*, vi
in tbis impact analysis, while Table II [-10 show*, tiic ,u«ubev of pLu.ts,
employees, and production of aluminum alley represented by e,i~h s^gmi'^t.
The majority of existing plantn it! the secondary :il jua^r. in in i-.^ try w: ' 1
require some dt-.gree of implementation and Investment- an sh^vr in Table Ti'I-S
t.o conform to the proposed guidelines for B.F.T. and B.A.F. iiowever,
111-34
-------
TABLE II1-8
I
u>
Wastewater Type
Metal cooling water
Wet Milling of residues
Wet Scrubbing on fumes
- Chlorine demagging
- A1F3 demagging
COSTS FOR MEETING PROPOSED EFFLUENT GUIDELINES
SECONDARY ALUMINUM SMELTING
(C/lb.
1977
Capital Annual
Investment Cost
.037 .012
.39-. 69 .15-. 49
.13 .068
.58 .18
of product)
1983
Capital Annual
Investment Cost
.037 .012
5.9 1.8
.28 .19
.58 .18
NEW SOURCE
Capital Annual
Investment Cost
.037 .012
5.9 1.8
.13 .068
.58 .18
SOURCE: Effluent Guideline Development Document and the Environmental Protection Agency.
-------
TABLE III-9
INDUSTRY SEGMENTS
SEGMENT
1
2
3
4
5
SIZE
Large
Small
Large
Small
Large
Small
PRODUCT
Aluminum Ingot
Aluminum Ingot
Aluminum Ingot
Aluminum Ingot
Aluminum Billet,
plate and sheet
Aluminum Bi11et,
plate and sheet
RAW MATERIAL
Drosses
Drosses
Scrap Aluminum
Scrap Aluminum
Scrap Aluminum
>. rap A J urn i nun
111-36
-------
TABLE 111-10
PLANTS. EMPLOYEES. AND PRODUCTION AND PERCENTS
OF INDUSTRY TOTALS REPRESENTED BY EACH SEGMENT
PLANTS
Segment
1
2
3
4
5
6
Totals
Number
10
6
24
19
9
69
Percent of1
Industry
10
6
24
19
9
69
EMPLOYEES
Number
1200
140
2500
770
450
20
5080
Percent of1
Industry
22
3
44
13
8
*1
90
PRODUCTION
Millions of
Pounds/Month
38.4
4.4
71.0
15.3
25.0
0.7
Percent of
Industry
23
3
43
9
15
0.5
154.8
94
1. Percentages may not add because of independent rounding.
SOURCE: ADL Estimates
111-37
-------
these costs will not cause serious impacts in the way of production cur-
tailments or plant closings except in a minor number of cases. We have
made this assumption on the basis of two observations:
1. The financially weaker companies were closed during the
general economic slow-down of 1969-71, therefore, only the
stronger ones still exist.
2, Costs of more than 3c/lb. of product for capital investment and
lC/lb. for annual costs will cause severe impacts and possible
plant closings.
The exceptions involve plants or departments of plants which do
wet processing of drosses. These plants and departments will be severely
impacted and could lead to plant closings or production curtailments
due to the B.A.T. recommendations.
The closing of wet dross processing plants will affect segments 1,
2, and 3, although not all to the same degree. Segment 2 will be most
severely impacted since the effect of the guidelines (B.P.T. and B.A.T.)
will be to close three plants out of a total of six. An additional plant
will be closed in segment 1. Closing of dross processing departments
will occur at two plants in segment 3. The numbers of employees and
quantities of production involved will be discussed in more detail later.
The major effect of N.S.P.S. guidelines will be the discouragement
of building new wet dross processing plants. Any new dross processing
plants will be forced to use dry processing methods, although this route
presents several other problems to be described further on.
4. Price Effects
The probability of the industry being able to increase prices because
of the additional cost of doing business is not likely. Instead, there
probably will be an increase in the spread between the scrap and finished
product price which will have to take place over a period of time. This
means that the scrap suppliers will gradually reduce the price of scrap
to the smelters. With the market as susceptible to supply and demand
as it is, there have been times when large smelters and small have actually
sold production at a substantial loss (see public figures relating to
U.S. Reduction Co. 1970-71). These occurrences have been a result of the
higher cost of labor and fuel and other ancillary costs coupled with de-
pressed prices.
Secondary effects of the additional costs will be a profit squeeze
during times of low demand and high supply, without an offsetting spread
in profit when the reverse situation is true.
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5. Financial Effects
The basic effect of increased pollution control equipment will be
to decrease the overall profit of the industry a majority of the time
but not allow it to increase beyond its present structure during the
highly profitable periods which occur.
The capital will, in general, be available for all but the very
smallest and most marginal of the operators. However, this money must
come from the only capital sources that are generally available to
these companies, i.e. short-term loans. This will mean that the ability
of the industry to expand will be decreased somewhat except under condi-
tions of tight supply, high prices, and high profits when this income
can be used to pay for capital equipment.
6. Production Effects
Because of the additional requirements for more careful operation
in order to stay within the design parameters of pollution control equip-
ment,there has been a tendency toward somewhat reduced production. With
the curtailment of wet dross processing by the presently used techniques,
this will reduce the availability of scrap to the industry since at least
a portion of the materials being reclaimed by wet processes today are
not amenable to dry process without great expense and reducing the through-
put through the dry milling systems.
It is our estimate that three small wet dross processors and one
large wet dross processor would shut down completely and two plants which
operate wet dross departments would be forced to shut down these depart-
ments. It is unlikely, if dumping is available, that these materials
would be processed in new facilities within these plants.
The combined effect of plant and department closings would be a
production curtailment of about five to six million pounds of aluminum
per month or three to four percent of the total output of the 69 plants
being considered.
The effect on the growth of the industry will be minimal so long
as landfill is available for the disposal of smelter skims. On the other
hand, if this is the only available endpoint for these materials, the
profitability of the operations will decrease since the metallics that
would otherwise be recovered from these materials will be lost to landfill.
7. Employment Effects
The curtailment of the wet dross processing departments in two plants
would mean the loss of about 20 jobs at each of these plants or a total
of 40 lost jobs. Th. three small wet processing plants and one large
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plant will probably have to be shut down since the technology that they
will require and the capitalization to install this technology would be
far beyond the capabilities of these companies. In general, this would
mean the loss of a total of about 70 jobs at the three sites and 50 jobs
at the remaining site.
This total of about 160 employees represents about three percent of
the estimated 5080 employees at the 69 plants. In addition, there is
the possibility because of the lower production output caused by the
more stringent pollution control guidelines for all plants that an addi-
tional number of jobs may be lost in the industry. The total will probably
not exceed five percent of the total force in the industry. Offsetting
these plant closings will be the continued growth of the industry which
will, in effect, allow these people to be re-absorbed into the industry.
8. Resultant Community Effects
The plants which will be forced to close completely consist of one
located in California; a second located in the state of Washington; and
two in Ohio. There will be production curtailment at one smelter in
Pennsylvania and at one in Ohio.
The communities surrounding these plants will receive a minimal
impact to the extent of no more than 50 jobs lost at each location. The
number of employees involved in each of these plants is small in relation
to size of the community in which each plant is located. It is, therefore,
probable that these people will be able to be absorbed into the workforce
of other industry.
It is extremely difficult to predict whether or not new plants will
be built in the concerned areas. Plants will be built to process these
drosses only if someone contemplates an economic return for a dry dross
processing plant. It can be anticipated that the materials presently
being processed by the existing wet dross processing plants would be
processed by new plants using dry processes which would eliminate the
water pollution aspects of the problem insofar as navigable streams are
concerned. However, several other problems are encountered with the dry
process:
1. High capital cost
2. High operating cost - mainly from increased energy requirements
3. Presents a solid waste consisting of highly water soluble salts
which when leached by rain water presents a possible ground water
pollution problem
4. Some materials being reclaimed by wet processes are not amenable
to dry process without great expense and reduced throughput.
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There is some possibility of secondary effects in these plants. For
example, there will probably be a curtailment in the two smelting plants
since they will have less scrap available to them from this relatively
inexpensive source (drosses). At this point, the management of the indi-
viaual companies will be presented with one of three choicesj
1. Convert to a dry process, accepting the problems mentioned
above.
2. Replace this cheap scrap with a more expensive scrap which
does not have to be elaborately prepared and thus maintain
the output of their furnaces.
3. Reduce the output of their furnaces rather than paying for
the higher cost scrap. A reduction in output would also
result in increased costs per pound of aluminum produced
since they would be operating below capacity. It may also
cause a possible reduction in the workforce in the rest of
the plant.
G. LIMITS OF THE ANALYSIS
1. Accuracy
The plants which have been enumerated and the production outputs
of the various plants are reasonably precise. The normal production
from any one of these facilities has been closely estimated based on
either plant visits or other personal inputs.
2. Range of Error
The range of error insofar as production capability is concerned
is plus or minus ten percent. This range represents more the normal
variations of overtime output during strong market periods than inaccura-
cies in the estimate.
3. Critical Assumptions
The two critical assumptions made in the previous analysis were:
1. The financially weaker companies were closed during the
general economic slow-down of 1969-71, therefore, only the
stronger ones still exist.
2. Costs of more than 3
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The first assumption is generally true in that a number of plants
did close during the 1969-71 period and the entire industry is just be-
ginning to see signs of good times ahead.
The typical margin in the industry is on the order of l-2c/lb. of
product, therefore, an increase in annual costs of lc/lb. or more would
be a severe impact. Annual costs for this type of equipment are usually
about 30 percent of capital investment, thus, placing the critical amount
of capital investment at about 3c/lb. of product. It should be noted,
however, that the above generalizations might not apply in specific
instances. In the secondary metals industries it is not unusual to
finance significant capital expenditures out of the cash flow or by
using short-term debt when market conditions are favorable and profits
are high.
4. Questions Remaining to be Answered
A relatively large amount of aluminum shot is manufactured for
deoxidizing purposes as well as in a specific array of alloys for
additions to zinc in the manufacture of zamak alloys. The production
of shot will generally involve the use of large quantities of water
in order to quench. The size and production requirements of a parti-
cular plant will determine the amount of water. The water temperature
of the incoming water is critical to the proper production of shot with
minimum hollow pieces in the product and with proper sizing.
This water is mainly used for thermal transfer and will not pick
up any particular impurities, although obviously the evaporation of
water from hard or even reasonably soft water will build up eventually
so that it may be necessary for the disposal of water containing higher
than normal dissolved solids.
The one way that water can be conserved in this type of operation
is by means of a cooling tower. During most of the year in the northern
section of the country this is quite competent to do the job. However,
during the summer months and particularly during the summer in the south-
ern section of the country the cooling effects of a cooling tower are
generally not capable of giving the sufficiently low water temperature
required for proper shot manufacture. It is for this reason that many
companies have gone to one time through water flow even though the cost
of water is somewhat higher this way than with the installation of
cooling towers and recirculation.
If it was not possible to discharge this thermally loaded water to
waterways or sewer systems, the use of a cooling tower followed by
refrigeration to bring the temperatures down to about 65°F would be
necessary. Alternative to this is a lower production rate and a higher
reject proportion if the temperature were raised.
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We have not assessed the economic impact of the proposed guidelines
on these plants since there are many variables involved. These include:
1. Volumes of water used
2. Production rate
3. Type of shot produced
4. Water availability
5. Yearly temperature variation.
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PART IV - APPENDIX
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APPENDIX
ALUMINA PURCHASE CONTRACT SAMPLE
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THIS CONTRACT made and entered into this day of April, lc)
by and between Buyer, a corporation organized and existing under the laws of
the (hereinafter referred to as Buyer), and Seller,
a corporation organized and existing under the laws of _
(hereinafter referred to as Seller,
WITNESSETH
WHEREAS, Buyer will require a continuing supply of alumina for the operation
of its aluminum reduction plant consisting of two pot lines having an aggre-
gate capacity of approximately 54,000 short tons of aluminum per year, to
be located in the vicinity of , ; and
WHEREAS, Seller is willing to furnish alumina to Buyer upon the ttrnib i-ul
conditions hereinafter stated, but in order to do so must construct aa.n -
tional facilities and rehabilitate its existing plant;
NOW, THEREFORE, the parties hereto, in consideration of the mutual i-i.tenants
and conditions hereinafter set forth, agree as follows:
ARTICLE ONE
QUANTITY OF ALUMINA TO BE PURCHASED
1. Buyer agree* to purchase from Seller, alumina for the operation of
its reduction plant and to pay the price or prices hereinafter set forth,
and Seller agrees to sell and deliver to Buyer the said alumina, upon the
terms and conditions as set forth in this Contract.
2. The said alumina so to be purchased and paid for by Buyer and sold
and delivered by Seller shall be 54,000 short tons per annum. The first
year shall run from the date of readiness under this Contract referred to
in Article TEN, and each succeeding year shall commence running on the
anniversary thereof.
3. Seller shall deliver to Buyer alumina, f.o.b., port, in bulk, in
minimum 5,400 short ton lots per one vessel or such larger tonnage as Buyer
may require. However, the quantity of one lot shall not exceed approxi-
mately 9,900 short tons.
4. Notwithstanding the foregoing agreement as to quantities per annum
required to be delivered, it is expressly understood and agreed by and
between the parties hereto, that within one month of the date of receipt
by Seller of the Notice of Readiness under this Contract referred to in
Article TEN, the parties hereto will negotiate in good faith for the pur-
pose of agreeing upon the quantity of alumina Buyer shall be required to
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order and take delivery of during the first year of its operation under
this Contract.
5. In case such quantity has not been agreed upon within the one-month
period as aforesaid, the minimum quantity which Buyer shall order, and
take delivery of, in the first year of operation shall be 42,000 short
tons.
6. Each annual tonnage to be ordered and delivered after the first
year of operation shall be discussed and agreed upon by both parties not
later than six (6) months before the beginning of each year of operation.
In case agreement has not been reached, the provisions of Paragraph 2 of
this Article ONE above shall govern with respect to the quantity to be
ordered and delivered during the following year of operation.
7. It is recognized that there may be minor variations in tonnage
delivered or purchased hereunder from those tonnages specified in or
agreed to in accordance with the preceding paragraphs of this Article ONE.
Such variations shall not be in breach of this Contract giving rise to
a right to damages or other remedy to either party hereto.
ARTICLE TWO
SPECIFICATION OF ALUMINA
1. Seller shall supply Buyer with such alumina as its analytical value
shall, in each shipment and at the port of departure, conform to the below-
mentioned specification. The methods of sampling and analysis shall be
in accordance with the provisions of Article THREE.
Loss on Ignition 1.00% Max.
Si°2 0.04% Max.
Fe2°3 0.05% Max.
Ti°2 0.01% Max.
Na?0 0.65% Max.
Moisture Adsorption 2.00% Max.
All other impurities not
to exceed 0.01% Max.
2. Alumina shall be white and powdery and have a screen analysis of
about 50 per cent passing through a 325 mesh Tyler standard screen.
3. The loss on ignition value specified above shall be typical of
freshly calcined alumina and shall consist chiefly of residual water of
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crystallization with only a trace of adsorbed moisture. Moisture adsorp-
tion shall consist of residual water of crystallization plus total moisture
that can be adsorbed through exposure to an atmosphere of relative humidity
of 44 per cent.
ARTICLE THREE
SAMPLING AND ANALYSIS OF ALUMINA
1. Seller shall sample and analyze, at its own cost, the alumina to
be shipped at the time of loading each vessel in accordance with the
Standard Methods adopted and practiced in by Seller. The state-
ment of the methods of sampling and analysis as referred to above is
attached to this Contract and is made a part hereof. Buyer shall have
the right to inspect the sampling procedures of Seller.
2. Seller shall prepare a report on analysis in accordance with its
Standard Methods and shall send it by airmail to Buyer without delay.
3. Samples shall be promptly air-expressed by Seller to Buyer together
with a report of all such analyses. Buyer shall have the right to check
the samples, such testing to follow standard testing procedures. Buyer
shall have the right to re-sample and re-analyze the shipment at the time
of unloading, such sampling and analyses to follow standard sampling and
testing procedures and to take into account salt water or other contamina-
tion resulting from the voyage across the Pacific.
4. Seller and Buyer will both make available, upon request of either
for mutual inspection, any and all records of tests and analyses made of
the alumina.
ARTICLE FOUR
TIME OF DELIVERY
1. When Seller has completed the loading of the vessel dispatched in
accordance with the vessel-arrangement schedule submitted by Buyer, as
provided for in Article FIVE, with the alumina f.o.b. port, in bulk, and
the bill of lading has been issued, the alumina shall be deemed to have
been delivered to and taken by Buyer.
2. All the expenses of materials and installation for shifting boards
shall be borne by Buyer, and the trimming shall be made at the cost of
Seller.
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ARTICLE FIVE
VESSEL-ARRANGEMENT SCHEDULE AND DELAY OF DISPATCHING VESSELS
1. Buyer shall take delivery of the quantity of alumina agreed upon under
Article ONE, in accordance with a vessel-arrangement schedule providing for
the arrival of vessels at reasonably spaced intervals, which take into account
procurement from more than one supplier in and the maximum and minimum
quantities referred to in Paragraph 3 of Article ONE, during each year, and
such vessel-arrangement schedule shall be submitted to Seller four (4) months
in advance of the dispatch of the first vessel for each year.
2. Buyer shall, whenever it dispatches a vessel, notify Seller at least
three (3) weeks in advance of the expected time of arrival of such vessel at
port and furnish Seller the name, tonnage, owner and charterer of the vessel
to enable Seller to make arrangements for loading.
3. Buyer shall, at the same time it gives Seller the notice referred to
in Paragraph 2 above, notify Seller, in writing, of the pertinent conditions
of the charter party necessary for Seller to complete the loading.
4. In case it is foreseen clearly at the time of notification referred to
in Paragraph above that the arrival of a vessel may be later than the last
day of the scheduled period set forth in the annual vessel-arrangement
schedule, Buyer shall notify Seller of the reason for the delay, in as much
detail as possible.
5. In case a vessel arrives more than fifteen (15) days after the last
day of the scheduled period set forth in the annual vessel-arrangement schedule
and more than ten (10) days after the expected time of arrival referred to in
Paragraph 2 above, Buyer shall pay Seller as liquidated damages for each day
after the tenth day from such expected time of arrival the sum of Four Hundred
U.S. Dollars (U.S. $400). For the purpose of this Paragraph, a vessel shall
be considered to have arrived at Seller's port when it is ready to proceed
to anchor there.
ARTICLE SIX
LOADING RATE PER DAY. LAYTIME AND DEMURRAGE AND DISPATCH
1. Loading of alumina shall be made at the rate of 2,200 short tons per
day. The free loading time shall be limited to weather working days, Sun-
days and national and local holidays always excepted.
2. The laytime shall commence at 4:00 p.m. when the notice of prepared-
ness is tendered by the master of the vessel and accepted by the authorized
personnel of the plant of Seller at any time during office
hours before noon. In case such notice of preparedness is rendered and
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accepted at any time during office hours in the afternoon, the laytime shall
commence at 8:00 a.m. on the following day. Seller shall not be required
to accept a notice of preparedness in the afternoon on Saturday.
3. In case the completion of the loading is delayed over the period
counted on the basis of the loading rate of 2,200 short tons per day, Seller
shall pay Buyer demurrage at the rate of One Thousand U.S. Dollars (U.S.
$1,000) per day or pro rata for part of a day.
4. Buyer shall pay Seller dispatch money at the rate of Five Hundred U.S.
Dollars (U.S. $500) per day or pro rata for part of a day for all laytime
saved in loading.
5. If a vessel arrives more than two days before the expected time of
arrival referred to in Paragraph 2 of Article FIVE, the loading of alumina
and demurrage shall be computed from 8:00 a.m. of the second day before such
expected time of arrival even though such loading may actually begin before
that time.
ARTICLE SEVEN
WEIGHING
Weighing by draught at Seller's port shall be at Seller's cost and shall
be final, after it has been certified by an internationally recognized
surveyor, to be appointed by Seller every six (6) months of operation
under this Contract, subject to the agreement of Buyer, which agreement
shall not be unreasonably withheld. Copies of weight certificates shall
be sent to Buyer along with shipping documents.
ARTICLE EIGHT
PRICE AND PRICE ADMUSTMENT
1. The base price to be paid for the alumina delivered by Seller to
Buyer shall be Sixty-eight Dollars (U.S. $68.00) per short ton, free on
board, port. Such price is based upon the arithmetic average of the
current published market prices in the United States as of the date of
this Contract, of three corporations producing pig aluminum in the U.S.
(namely: Aluminum Company of America, Kaiser Aluminum & Chemical Cor-
poration and Reynolds Metals Company). This average price is at present
Twenty-four U.S. Cents (U.S. $0.24) per pound of aluminum pig of 99.0
per cent average guaranteed minimum purity.
2. However, the base price referred to above shall be increased or de-
creased, as the case may be, by Three U.S. Dollars (U.S. $3.00) per short
ton for each One U.S. Cent (1C) increase over or decrease under Twenty-
four U.S. Cents (U.S. $0.24) per pound in the average price per pound
referred to above, at the time of issuance of the bill of lading for the
alumina shipped. Notwithstanding the foregoing provisions, such base
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price shall be increased or decreased by only Two Dollars and Fifty Cents
U.S. (U.S. $2.50) per short ton for the first One U.S. Cent increase over
or decrease under such Twenty-four U.S. Cent price, at the time of issuance
of the bill of lading for the alumina shipped.
3. If the variation in the average price per pound referred to above
is only a fraction of One U.S. Cent (lc) , the adjustment of the price of
alumina shall be made in due proportion thereof.
A. Buyer shall notify Seller of the latest published market prices
mentioned above by telegraph and in writing immediately after they have
been made public.
ARTICLE NINE
MEDIA OF EXCHANGE
1. All payments and prices referred to in this Contract shall be made
and computed in the United States Currency.
2. Notwithstanding the foregoing provisions, subject to obtaining the
necessary approvals from governmental authorities in or
the , Buyer may, with the agreement of Seller, make part or
all of the payments for alumina provided for hereunder by deliveries of
aluminum pig to Seller.
ARTICLE TEN
APPROVALS. BASIC TERM AND TERMINATION OF CONTRACT
1. Seller shall have until in which to obtain
permission or approval of this Contract from the Government
authorities in accordance with the laws; provided, however,
that such period shall be extended to if such permission
or approval shall not be received on or before such earlier date.
After the permission or approval of the Government
authorities is obtained, Buyer shall have until in which
to obtain approval of this Contract by (a) the Government of
acting through its General Services Administration, and (b) the banking
institutions referred to in Article FOURTEEN participating in the finan-
cing of the construction of Buyer's aluminum reduction plant. If Buyer
obtains approvals abovementioned within such period, Buyer shall promptly
notify Seller and this Contract shall remain in full force and effect.
If such approvals are not obtained within such period, this Contract
shall be null and void and of no force and effect whatsoever. Buyer
shall notify Seller promptly after if such approvals have
not been obtained.
2. The basic term of this Contract shall be for a period of ten (10)
years following the date of readiness under this Contract, which date
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shall be the date when Buyer desires to commence the supply of alumina tor
its aluminum reduction plant, as fixed by written Notice of Readiness from
Buyer to Seller. Such date of readiness shall be fixed no earlier than
and no later than , and the
Notice of Readiness fixing such date shall be given at least one hundred and
eighty (180) days in advance of such date.
3. Either party may terminate this Contract on any date after the expiration
of five (5) years from the date of readiness referred to in Paragraph 2 of this
Article. Such termination shall be effective only if the party desiring to
terminate has given the other party written notice of intention to terminate
(which notice may be given prior to the end of such five-year period) at
least eighteen (18) months prior to the date of termination.
ARTICLE ELEVEN
CANCELLATION OF CONTRACT ON FAILURE TO TAKE FIRST DELIVERY
Seller may cancel this Contract by a notice in writing to Buyer in the
event Buyer does not take delivery of any alumina pursuant to this Contract
within three (3) months after the date of readiness fixed in accordance with
Paragraph 2 of Article TEN. The right of cancellation provided for in the
preceding sentence shall not be exercisable if the failure to take delivery
of alumina arises out of the causes specified in Article TWELVE but such
non-exercise of the right to cancel shall not extend beyond six (6) months
from the occurrence of such causes.
ARTICLE TWELVE
FORCE MAJEURE
Any non-performance of its obligations under this Contract by either
party hereto shall not be a breach of this Contract if such non-performance
shall arise out of or result from an inability to perform on the part of such
party or from the failure of Seller to have the supply or of Buyer to have the
requirements of alumina covered by this Contract, which inability or failure
shall be caused (1) by any typhoon, strike, labor difficulty, lockout, fire,
explosion, flood, war, hostilities, riot, rebellion, revolution, blockage,
quarantine restrictions or other act or acts of the respective governments of
the parties, whether legal or otherwise, acts of public enemies, or the elements,
or (2) by any other contingency which is beyond the control and without the
fault or negligence of Buyer or Seller. The term of this Contract shall be
extended by the length of time during which any such inability to perform or
failure of supply or requirements shall exist. Each party hereto agrees to
give notice to the other within fifteen (15) days after the occurrence of any
such inability or failure and to use diligence to remove or remedy any such
inability or failure. Notwithstanding the foregoing provisions in this Article,
if there is a non-performance of obligations under this Contract (which by
reason of the provisions of this Article shall not be a breach of this
Contract) by either party for a period longer than six (6) months, then the
other party may, at its option, elect to terminate this Contract by written
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notice given prior to the resumption of performance hereunder, and upon such
termination, neither party shall have any liability to the other hereunder
in respect of such non-performance.
ARTICLE THIRTEEN
ALUMINA FROM OTHER SOURCES
Seller may deliver alumina from any source other than from its own
plant, provided that the quality thereof shall conform with the specification
stipulated in Article TWO, and provided further that the delivery of such
alumina shall not cause or involve any greater cost to Buyer, due to the in-
creased price of such alumina, the cost of shipping or transportation thereof
and any other reason, than the shipment of alumina made directly from Seller's
alumina plant to Buyer.
ARTICLE FOURTEEN
ASSIGNMENT OF CONTRACT
Buyer may, at any time, upon sixty (60) days' notice in writing to
Seller, assign this Contract to any of its controlled subsidiary or controlled
affiliated corporations, provided that such assignment shall not operate to
relieve Buyer from any of its obligations hereunder, unless otherwise agreed
upon between the parties.
It is further agreed by and between the parties that Buyer may at any
time assign this Contract to Bank of America National Trust and Savings
Association, The Chase Manhattan Bank and The First National City Bank of
New York as security for loans to be made by such banks to Buyer for financing
the construction of Buyer's aluminum reduction plant. Buyer shall at all times
remain bound by the terms of this Contract as fully as if such assignment had
not been made. In the event of any sale or transfer of this Contract by such
banks, by reason of the occurrence of a default under the Loan Agreement between
Buyer and such banks, such sale or transfer shall be accepted by the purchaser
or transferee, subject to the express condition that such purchaser or trans-
feree shall be thereafter bound by the terms of this Contract as fully as if
such purchaser or transferee alone had executed this Contract in place of
Buyer. Such assignment shall provide that so long as Buyer is not in default
under the Loan Agreement between Buyer and such banks, Buyer shall have the
right to operate under this Contract as though such assignment had not been
made, and that such banks do not assume any liabilities under this Contract
and shall not be reason of such assignment become liable in any respect what-
soever to Seller. A copy of any such assignment and any such acceptance by
such purchaser or transferee shall be sent promptly to Seller.
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ARTICLE FIFTEEN
PAYMENT
1. Except as may be otherwise agreed, payment by Buyer shall be made by
irrevocable letter of credit in favor of Seller against shipping documents.
This letter of credit shall cover ten per cent more than the value equivalent
to the amount of scheduled shipment. However, Seller can only draw on such
letter of credit referred to in the preceding sentence in each case an amount
equivalent to the price for the quantity actually shipped and the fee for
consular invoice issued by the Consulate in Seller's country.
2. The letter of credit shall be opened thirty (30) days in advance : ihe
expected date of arrival referred to in Paragraph 2 of Article FIVE fur the first
shipment and ten (10) days for all the following shipments.
3. The letter of credit shall be extended as required.
ARTICLE SIXTEEN
NOTICE
1. Any notice provided for in this Contract shall be given by one party
to the other by registered mail with return receipt requested and shall be
addressed to the office of Buyer or to the office of Seller, as the case may
be.
2. Except as otherwise provided, the said notice shall come into effect
when it reaches the party to whom addressed.
ARTICLE SEVENTEEN
ENTIRETY OF CONTRACT
This Contract represents the entire agreement between the parties hereto
with respect to the subject matter hereof. This Contract may be modified or
amended only by mutual agreement of the parties expressed in writing. This
Contract has been signed by the authorized corporate officers of the respective
parties. The duplicate counterparts of this Contract have been prepared and
executed in English and shall be binding upon both parties and determinative
of the rights of the parties.
This Contract shall come into effect and be interpreted in accordance
with law of Seller's country.
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ARTICLE EIGHTEEN
ARBITRATION
Any dispute arising under or by virtue of this Contract shall be referred
to arbitration by the parties. Such arbitration shall take place in Japan and
shall be in accordance with the regulations of the Coiranerical Arbitration
Association and the laws of Seller's country. The party which desires arbitra-
tion must give written notice to the other party of a demand for arbitration,
together with the name of the arbitrator whom it appoints and the general nature
of the dispute or disputes. The other party shall appoint an arbitrator
within thirty (30) days, and if it shall fail to do so, the arbitrator appointed
by the first party shall be the sole arbitrator. If two arbitrators shall be
appointed, they shall select a third arbitrator within thirty (30) days, and
if they fail to do so, the third arbitrator shall be appointed by the
Commercial Arbitration Association of Seller's country. In any event, the
arbitrator or arbitrators shall be chosen from the Panel of the Commercial
Arbitration Association of Seller's country. The award of two of three
arbitrators shall be final and conclusive. In case there is one arbitrator
only, the award of such an arbitrator shall be final and conclusive.
ARTICLE NINETEEN
PRICE RE-DETERMINATION
If either party considers, during the term of this Contract, that there
have arisen changes in the economic conditions, re-determination of or change
in the foreign exchange rate, major changes in the prices of raw materials which
are not compensated for by changes in the price hereunder and/or other
similar causes which would result in loss on the part of such party, such
party may at any time propose in writing to the other party for re-determination
of price, and the parties shall then proceed to discussions within thirty
(30) days.
If upon expiration of sixty (60) days after the commencement of such
discussions the parties hereto fail to agree upon a renegotiated price to be
effective during the remainder of the term of this Contract, the price pro-
visions in this Contract shall continue to be in effect until otherwise
modified by the parties by mutual agreement.
ARTICLE TWENTY
CANCELLATION OF CONTRACT ON DEFAULT
The parties hereto clearly recognize that prompt delivery and taking
of the alumina herein contracted for in accordance with the terms hereof are
of the essence of this Contract and that delays and default and/or the failure
to deliver or take said supplies in accordance with the terms hereof will
cause damage and loss to Seller or Buyer, as the case may be.
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Subject to the provisions of Article TWELVE, if Seller fails to make
delivery of the supplies of alumina in accordance with this Contract within
sixty (60) days after it is required to do so under the terms of this Contract,
Buyer may at its option, by written notice of default to Seller, cancel this
Contract in whole or in part.
In the event either party exercises its right to cancel under this
Contract, it may then proceed to exercise such other and additional remedies,
at law, or by other means within the law, as are available to it, including
in the case of Seller the offsetting of any damages it may have suffered
against the advance payment referred to in Article TWENTY-ONE or the unpaid
balance thereof.
ARTICLE TWENTY-ONE
ADVANCE PAYMENT
Buyer shall advance to Seller within three (3) months from the date
when it has obtained all approvals referred to in Paragraph 1 of Article TEN,
the sum of Seven Hundred Thousand U.S. Dollars (U.S. $700,000), which amount
shall be an advance payment for alumina to be delivered by Seller under this
Contract. Such advance payment shall be applied as an offset against the
purchase price payable by Buyer for alumina to be delivered hereunder by
Seller, as follows:
(a) The purchase price of the first 50,000 short tons delivered during
the year following the third anniversaryof the making of such advance payment
shall be reduced by Four Dollars and Twenty Cents U.S. (U.S.$4.20) per short
ton.
(b) The purchase price of the first 50,000 short tons delivered during
the year following the fourth anniversary of the making of such advance payment
shall be reduced by Four Dollars and Twenty Cents U.S. (U.S. $4.20) per short
ton.
(c) The purchase price of the first 50,000 short tons delivered during
the year following the fifth anniversary of the making of such advance payment
shall be reduced by Five Dollars and Sixty Cents U.S. (U.S. $5.60) per short
ton.
Seller will pay interest at the rate of 5 per cent per annum on said
advance payment or on the unpaid balance thereof. Such interest shall be
payable to Buyer annually in U.S. Dollars on the anniversary date in each
year of the making of the advance payment.
In the event a default under this Contract on the part of either party
shall occur, or this Contract shall be cancelled as herein provided, then the
advance payment herein provided for or the balance thereof shall forthwith
become due in U.S. Dollars to Buyer with interest at the rate of 5 per cent
per annum, subject to the last paragraph of Article TWENTY.
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In the event the advance payment herein provided for shall not be
made by Buyer to Seller within the time above specified, Seller may cancel
this Contract and thereupon it shall be relieved of its obligation to supply
alumina to Buyer and shall not be liable to Buyer for any damages whatsoever
for so doing.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers and their corporate seals to
be hereunto affixed by authority of the Board of Directors of each of the
parties, as of the day and year first above written.
SELLER
By:
BUYER
By:
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