Hydropower economics underpin Canada’s supply advantage over U.S. production
President Trump removed Canada’s exemption from the 10% aluminum tariff he imposed during his first term and raised the rate on Canadian aluminum to 50% after returning to the White House, according to The Wall Street Journal. The levy pushed U.S. aluminum prices to a record premium over global benchmarks, increasing costs for automakers and other buyers. Canada has supplied about 70% of U.S. aluminum imports in recent years, aided by abundant hydropower that has kept electricity prices from rising as sharply as in the U.S. Trump said last month, “They’ve treated the United States very unfairly,” adding, “They have been one of the worst countries in the entire world.” He has said the U.S. has no need for Canada’s natural resources.
The U.S. price premium is reaching home buyers, data-center developers, automakers and grocery shoppers. Trading restrictions on Russian metal and the Iran War, which choked off Persian Gulf exports, also contributed to global price increases. Ford Motor has forecast as much as $2 billion of higher commodity costs this year. Semiconductor-equipment manufacturer Applied Materials, auto-parts maker Allison Transmission and can producer Ball have told investors that they are passing higher aluminum costs to customers.
The tariff was imposed in the name of national defense and is intended to stimulate U.S. production, but making aluminum requires enormous amounts of electricity. Electricity accounts for about 40% of the cost of making aluminum, and a single smelter can consume as much electricity as a city the size of Boston or Detroit. In 1886, Charles Martin Hall, 22, working in the woodshed behind his parents’ home in Oberlin, Ohio, had figured out how to mass produce aluminum inexpensively using electric currents. Until then, separating aluminum from its ore had made the metal more expensive than gold. The Hall-Héroult production process, named for Hall and a young Frenchman who made the same discovery simultaneously, ushered in new uses in aviation, electronics, construction, consumer packaging and warfare.
The United States led world aluminum production during the 20th century and supported it for decades with low-cost hydropower from federal utilities, the Tennessee Valley Authority and the Northwest’s Bonneville Power Administration. By the latter half of the century, as consumer power demand swelled, preferential power rates for smelters were phased out. China, Russia and other nations then began churning out low-cost aluminum, further squeezing U.S. producers by driving down market prices. Just four domestic smelters are now running, compared with 24 operating in 2000, when the U.S. last led the world in output.
The country has been adding recycling plants that melt old cans and scrap and use about 5% of the energy required to make primary aluminum. Recycled metal is not suitable for all uses; some aerospace, high-tech and military applications require the purity of primary aluminum, leaving the U.S. dependent on imports to meet some of its most critical needs. Commerce Secretary Howard Lutnick said this summer at an event celebrating Century Aluminum’s return to full production in Goose Creek, S.C., “You can’t protect yourself unless you can make the core inputs,” adding, “We need to have our own means of production.” Century’s Goose Creek smelter, built in 1980, was the last one constructed in the U.S. and was at risk of closing before Trump imposed trade barriers, Century has said.
Canada’s advantage rests heavily on hydropower. Rio Tinto generates more than 90% of the electricity it consumes at Saguenay with its own hydropower system, using water rights secured by tobacco magnate J.B. Duke a century ago. Jérôme Pécresse, who runs Rio’s aluminum, lithium and Canadian businesses, said, “We always call aluminum ‘solid electricity,’” and added, “We cannot find a source of power in the U.S. which is anywhere close to what we have in Canada in terms of competitiveness.” Pécresse said Saguenay had the least expensive power available to any of Rio’s smelters, which are spread from Tasmania to Iceland. He also called Saguenay the heart of Rio’s technical expertise in aluminum smelting and said it was well situated for the massive U.S. market. “There was a strong historical logic in the setup, and that logic still holds today,” he said. “It’s hard to imagine it being dislocated.”
Saguenay’s industrial scale began during World War II, when Nazi planes were blitzing London and the United States needed to build more aircraft and munitions quickly. The demand helped turn the remote Quebec forest into an aluminum-production hub. Thousands of Canadians labored through frigid conditions to build smelting pots and a hydropower plant to fuel them in just 18 months. Ever since then, Saguenay’s aluminum plants have supplied American industry.
J.B. Duke, the tobacco magnate who started Charlotte, N.C., power producer Duke Energy, recognized Saguenay’s hydroelectric potential early in the 20th century. He had aluminum in mind when he secured what the report called a “sweetheart deal” to harness it. Duke enticed Arthur Vining Davis, who had started Alcoa with Hall, the Ohio inventor, because Davis was interested in a smelting outpost to feed the booming U.S. market. Davis imported hydro engineers and aluminum-making technology and had a tidy neighborhood of U.S.-style suburban houses called Arvida built next to the smelters. David Massell, a University of Vermont history professor who has written about the Saguenay watershed, said, “This is the American empire,” describing the arrangement as “Bloodless conquest of resources and markets.”
When Canada heeded the U.S. call to increase aluminum production during World War II, old plans for another hydropower station and additional Saguenay smelting capacity were dusted off. The U.S. paid for metal up front, helping to finance construction. Canada built an air base to protect the operation. German U-boats hunted ships hauling ore from the Caribbean, killing scores of Canadian sailors. Canada’s version of Rosie the Riveter was Jos Alco, a francophone aluminum worker.
The Shipshaw power station, built during World War II, has produced electricity nonstop since it started in 1943. Its 13 turbines are the last in a chain of hydroelectric stations that begins in the wilderness about 150 miles upstream. Pécresse said, “We get electricity five times from the same drop of water,” adding, “Building hydropower-backed smelter infrastructure to serve the U.S. market has always made, and still makes, great sense.”
Alcoa, which dominated American aluminum production for decades, built the facilities upstream from the Saguenay Fjord, expanded them during World War II and later spun them off to meet antitrust rules. Anglo-Australian miner Rio Tinto now owns the hydropower stations, smelters, ore docks and other facilities. Rio, one of the largest aluminum producers outside China, is starting the West’s first new smelters in more than a decade. Much of the Canadian aluminum entering the U.S. comes from Rio’s Saguenay operation, which ships about 70% of its output across the border.
Rio spent $1.5 billion adding 96 efficient, low-carbon smelting pots to replace 100-year-old vats. This summer, Rio started firing the new lines, and it expects full production next year. A $30 million recycling plant under construction nearby also is scheduled to start next year.
Rio Tinto also is working in Quebec to commercialize a new carbon-free smelting process through Elysis, its joint venture with Alcoa and the provincial government, with support from the Canadian government and Apple. In a new, restricted-access building, Elysis is working to commercialize the carbon-free process, which remains secret. Apple, an investor in the venture, has used Elysis aluminum in iPhones, and the metal has been used in electrical cables made in Missouri and installed in an Amazon data center in Ohio.
Tariff proponents, including Century, contend that Canada’s inexpensive hydropower constitutes an unfair subsidy. They also allege dumping, which trade law defines as selling a product abroad for less than at home or below production costs. At the South Carolina event, Century Chief Executive Jesse Gary said, “China, Canada and other foreign adversaries had dumped massive amounts of aluminum into our country, cheated U.S. trade laws and flooded our markets,” and added, “Today is a direct result of President Trump’s tariff program.” Jean Simard, president and CEO of the Aluminium Association of Canada, an industry group, said the allegations had never been made in an international trade case and that Canadian producers had no incentive to sell the commodity below market prices. “Putting Canada in the same bag as China as a foreign adversary definitely shows a lack of perspective,” Simard said. “We were alongside the U.S. in many wars and saved American lives. I don’t think we’re a foreign adversary, not even a friendly adversary.”
Emirates Global Aluminium, the Mideast’s largest producer, and Chicago-based Century Aluminum have said they would spend more than $4 billion to build what would be the largest U.S. smelter, capable of more than doubling domestic production of primary aluminum. The Biden administration awarded $500 million for the project, and Trump has thrown his support behind it with additional incentives. Inola, the Oklahoma prairie town, was selected as the site.
Local critics have raised concerns about pollution and foreign ownership of land and objected to taxpayer-funded incentives for the developers. After a rowdy, marathon meeting in June where Trump officials promoting the smelter were heckled and booed, the Inola town council placed a moratorium on building permits and entitlements in its industrial park. Owners of property near the site sued in federal court seeking to block construction.
The smelter became a divisive issue in Oklahoma’s Republican gubernatorial primary. Former state senator Mike Mazzei came out in favor of it and won Trump’s endorsement and the nomination. Mazzei faced political ads that the report described as xenophobic and aimed at the project’s Mideast investors. A narrator in an ad made by a group called Put Oklahoma 1st said, “Mazzei wants to give your tax dollars to a Muslim country to build a smelter.” The ad also said, “Foreign workers, foreign landownership, threatening our way of life.”
On a public call to rally support for Mazzei, Trump vouched for Emirates Global as “very fine people with unlimited money” and said the smelter would bring jobs, tax revenue and the envy of other states. “This country desperately needs aluminum,” he said. “We get it all from Canada, for the most part, and we need it badly.”
Prime Minister Mark Carney is turning to Europe to forge new trade partnerships. The European Union’s top official said last month that she would work to add Canada as the trade bloc’s first associate member; Trump responded by threatening further tariffs on Europe and calling Canada “a terrible trade partner.” Through August of this year, Canadian aluminum shipments to Europe were up 77% from the year-earlier period. Karen Norton, an associate director at S&P Global Energy, said EU carbon taxes may steer more Canadian metal across the Atlantic to meet demand for lower-carbon metal. She warned, “The U.S. may have less access to Canadian metal than it does now.” Competition for that metal could add more price pressure for U.S. aluminum users.
In Saguenay, cruise ships share the scenic fjord with ore boats. Mayor Luc Boivin said the American tourists he meets on the quay are often quick to apologize for the trade war. Like many people in Saguenay, Boivin has a long list of family members and friends in the aluminum business. He likes to show off his Ford F-150 pickup truck, made with local aluminum. He said the region prospered by supplying U.S. industry with raw materials and becoming a market for American products built with them. “We have this smelter, we have the energy,” Boivin said. “I don’t know where the U.S. government will find a new supplier, and not only a supplier, a loyal supplier.”
The tariff has raised U.S. aluminum prices, while four domestic smelters operate and the United States remains dependent on imports to meet some of its most critical needs. The proposed Oklahoma smelter remains under a local moratorium and federal litigation. Rio is expanding in Saguenay, and Canadian shipments to Europe rose 77% through August.