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(JOEL SAGET)
(JOEL SAGET)

Konrad Yakabuski

Alcan subsidies and all that jazz suit Quebeckers fine Add to ...

kyakabuski@globeandmail.com

Visitors to Montreal might be forgiven for mistaking the city's new Maison du Festival Rio Tinto Alcan for a temple to aluminum foil. But the new headquarters of the city's renowned jazz festival is more like a celebration of Alcan's continued sway with policy makers in the province.

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How else do you explain why Alcan, the iconic Canadian aluminum maker that fused in 2007 with Aussie-British mining behemoth Rio Tinto, gets its name on a project overwhelmingly financed by taxpayers?

It's not immediately clear why Alcan - which just got an additional $175-million loan from the Quebec government, but is paying $4-million for naming rights on the jazz fest building - needs to spend scarce capital on such blatant self-promotion in the first place. Unlike a Bell, Rogers, Air Canada or Scotiabank, whose monikers show up on cultural and sporting venues across the land, Alcan has no consumer brand to promote.

No one drops by their local Home Depot or Rona to pick up a tonne of Alcan ingots. Even the famous foil that bears Alcan's name is now made (under a licensing agreement) by U.S-based Novelis, which is in turn owned by India's Hindalco Industries.

But none of that means the cash Alcan is doling out for the naming rights is a waste of money. The sponsorship aims to remind Quebeckers that what's good for Alcan is good for them, and jazz fest impresario Alain Simard did his part to cement that impression by calling the company his "most faithful partner." Foreign ownership has done nothing, it seems, to diminish Quebeckers' sense of proprietorship toward Alcan. Nor should it, considering their ample direct and indirect subsidization of the aluminum maker.

In our pre-crash world, it would have been easy to dismiss the $175-million loan Quebec extended to Alcan this month as plain poor economics. Heaped on to the mountain of goodies Quebec extended to Alcan just before its merger - an interest-free $400-million loan, $112-million in tax benefits, an additional block of electricity at below market prices and the renewal of hydro rights to produce its own power until 2058 - it might even have qualified as an insult to taxpayers.

But the latest loan, which Alcan says will allow it to continue construction on a new pilot smelter in Saguenay that uses next-generation technology, didn't generate a peep of derision.

The Quebec model of economic development, sprinkled with liberal amounts of subsidization, is finding new fans in this recession. Quebec's industrial strategy, as it regards the aluminum sector in particular, is looking prescient. Smelters around the world are closing or slashing capacity to cope with the commodity bust, everywhere, it seems, but in Quebec.

The result is that not only has Quebec's job market withstood the crisis in manufacturing better than just about any other in North America, free market purists everywhere are embracing their inner interventionist.

Though Alcan will move up the shuttering of its antiquated 65-year-old Beauharnois smelter to next month (instead of in 2011 as previously planned), the plant's closing will affect only 170 of the company's 7,300 Quebec employees and remove only 50,000 tonnes from its overall Quebec aluminum output of about 1.5 million tonnes annually.

A study released last week by the Canadian Auto Workers, and which uses data purchased from British metals consultant CRU Group, pegs the average cost of production at Alcan's Canadian smelters (there are eight in Quebec, and one in Kitimat, B.C.) at $1,388 (U.S.) a tonne, allowing them to remain profitable when virtually every other plant on the planet is in the red.

The price of aluminum averaged $1,396 in the first quarter of this year, or barely half the 2008 average of $2,620, and now hovers around $1,500. No wonder Canadian production has held steady, while U.S. aluminum output slid 36 per cent in April.

The Quebec industry's comparative advantage is due entirely to cheap electricity. Alcan generates most of the power it needs to operate its smelters at hydro stations that were grandfathered when Quebec nationalized the electricity sector in 1963. They produce power at six times less than the average rate paid by global aluminum producers. Like Alcoa's smelters in the province, Alcan gets the rest of its power from Hydro-Québec at rates far below market prices.

Were it a believer in free markets, Quebec could choose to wean Alcan and Alcoa. The power they use could be exported at market rates and Quebeckers would be richer for it. No Quebec government has ever bought into the idea. Premier Jean Charest may tout Hydro-Québec's export prowess, but the juice that flows south is really just a drip compared to the buckets of cut-rate power gulped up by the aluminum industry and other industrial users in the province.

In this recession, Quebeckers aren't complaining. So, the inauguration of the Maison du Festival Rio Tinto Alcan shows impeccable timing.

 

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