Heavy Industry, Part I
The problems

by Christopher Key

 

(Ed. note: This is the first of a two-part series exploring the problems and possible solutions facing heavy industry in Whatcom County.)

 

For the past couple of years, Whatcom County’s four major heavy industries have come under increasing scrutiny as a number of factors have led to layoffs at two of them. We wanted to find out if heavy industry is an endangered species in Whatcom County and, if so, what can be done about it. This month, we’ll examine some of the problems facing heavy industry.

Alcoa’s Intalco Works is grabbing most of the headlines at the moment. The Ferndale facility will be cutting back production and staffing to levels reminiscent of the power crunch two summers ago.

Mike Tanchuk is president of Northwest operations for Alcoa Primary Metals. He’s an engineer with business training who started his career with Reynolds Metal Company. Tanchuk served in staff and operations positions at facilities in Virginia, New York, and Longview, Washington. Reynolds and Alcoa merged three years ago and Tanchuk came to Intalco in late 2001.

“As far as we’re concerned,” Tanchuk said, “there’s only one issue: power.”

Alcoa’s interim agreement with the Bonneville Power Administration (BPA) will expire on September 30. If BPA implements a proposed 16 percent rate hike at that time, the plant will temporarily curtail production. How long is temporary?

“This is by far the most efficient smelter in the Northwest,” Tanchuk said, “but the current record high power prices and the uncertainty of the BPA process make operation extremely difficult. This operation needs certainty in power supply at a competitive price so we aren’t constantly looking over our shoulder at closure.”

The irony, of course, is that low power prices from BPA hydroelectric facilities is what lured the aluminum industry to this area in the first place. Aluminum production requires huge amounts of power, although the industry has instituted efficiencies over the years that have cut power usage to a certain extent.

Part of the problem is that the US aluminum industry now has to compete on a global basis. Raw material costs are high and the market for aluminum is fairly soft.

“Our power rates are already double what others are paying on the world market,” Tanchuk said. “It doesn’t matter how efficient we are, nobody can compete under those conditions.”

Intalco seems somewhat resigned to the planned BPA rate increases.

“We instituted salary reductions in April,” Tanchuk said, “and will implement staff reductions by the end of June. We’ll be back to the level of employment that existed before the restart of the two pot lines last May. We’ll adjust production as economic and market conditions warrant. The problem goes far beyond Whatcom County. Given current market conditions, it’s uncertain that we could continue to operate even without a rate increase.”

There will be 125 Intalco workers laid off by the end of this month and more reductions are possible as the summer goes on.

“We won’t know for certain about the rate increase until August,” Tanchuk said. “If it goes through, the costs to the economy will be horrendous and this operation can’t survive.”

Does that mean that Intalco in particular and heavy industry in general are on the way out in Whatcom County?

“It will only happen if we let it,” Tanchuk said. “BPA has to get its costs under control. They added 500 people in the face of a difficult economy. It seems like their goal is to make a treasury payment regardless of how that affects the economy of the region or the good of the community as a whole. BPA is becoming a drain on the economy rather than a boost.”

For years, Georgia-Pacific (G-P) has dominated the waterfront and the economy of Bellingham. That era may have ended with the closure two years ago of the firm’s pulp and chemical operations, resulting in the loss of over 400 jobs. It also took 20 million in wages out the county in a time of economic downturn.

Glenn Taylor is general manager of Bellingham operations and traces his career through G-P’s merger with Fort James, which earlier had merged with Fort Howard. Unlike the other heavy industry executives we interviewed, Taylor’s background is in business rather than engineering. He spent half of his career in China and Korea before coming to Bellingham seven months ago.

“This nation as a whole, and heavy industry in particular, faces international competition,” Taylor said. “When we just had to compete in the US, we were insulated to a certain degree from tariffs and higher shipping costs. All that has changed.”

Doing business in the state of Washington is also problematic.

“We have higher costs here for materials, labor and health care,” Taylor said. “This operation in particular has high Unemployment Insurance costs due to the shutdown of the pulp mill. How can we compete with the lower labor costs overseas and even in the Southern US, which is less unionized?”

Taylor predicts that the steel industry, for example, will go bankrupt unless there are some controls established over costs and benefits.

“The environmental impact of heavy industry has been extensive,” Taylor said. “But keep in mind that we were not breaking any laws at the time. As our knowledge and technology have increased, we now know that this was not a good thing. Concerns about mercury in the bay are certainly justified. Now we have to clean up and we accept that responsibility. But we have been treated like criminals even though the technology to prevent pollution did not exist 30 years ago. Heavy industry has cleaned up dramatically in the last 20 years. Now, if we violate environmental laws I go to jail.”

Taylor insists that G-P wants to do the right thing and won’t accept any waterfront plan that doesn’t address the cleanup. But that responsibility adds to operating costs.

“When I went to China,” Taylor said, “everything was very labor intensive. We used labor for things we wouldn’t even consider here. Now, many of the companies doing business in China are putting in the most modern equipment in the world. Couple that with lower labor costs and it’s very tough to compete. It’s a mistake to assume that just because a factory is in Asia, it’s a sweatshop. They do exist, but more modern facilities are replacing them. Even though wages are lower, the standard of living is increasing because the cost of living is so much lower.”

What is going to happen to so-called family wage jobs in this country?

“The days are numbered when you could step out of high school into a family wage job,” Taylor said. “You have to have some kind of skills training. We no longer consider folks without a high school education. In 20 years, most of the jobs in Bellingham may be in retail, tourism, service industries. Will people who are not retired be able to afford to live here?”

Two of Whatcom County’s heavy industries are oil refineries and, so far, they have not been impacted as heavily by the forces that have affected Intalco and G-P.

Gary Goodman is a chemical engineer by training and has worked at what is now ConocoPhillips through many ownership changes. Those changes took him to New York with the Mobil Oil Corporation, then back as assistant manager of the Tosco Refinery. With the latest change in ownership, he’s now plant manager.

“The cost of power is also a concern for us,” Goodman said. “It’s nothing like it is for Intalco, but it’s still a big factor. We’re closely monitoring the power situation. BPA is obviously playing catchup after a drought year. They are now required to operate their dams in a fish-friendly manner and there are some costs attached to that. We’re currently locked into a medium-term contract with the PUD (Public Utility District), but the power still comes from BPA. That saved us money over buying power on the spot market. We don’t buy power from the Tenaska co-gen, but that could change in the future.”

Water is also a concern.

“Restoring salmon habitat in the Nooksack River is good,” Goodman said, “but all of the heavy industries need to know what changes that will make in future water supplies.”

Taxes are always a challenge, especially for refineries.

“The Model Toxic Control Act levies a .07 percent tax to help clean up hazardous waste sites,” Goodman said. That generates $50 million a year and ninety percent of that comes from the oil industry. Another tax of .05 percent is designed to deal with leaking underground tanks. There’s a state oil spill tax of five cents a gallon. That’s all well and good, but don’t divert those monies to provide relief to the general fund.”

One of the major problems facing heavy industry is one of public perception.

“We have changed a great deal since the bad old days,” Goodman said. “Our new Fluidized Catalytic Cracking Unit has reduced our sulfur dioxide emissions by 99 percent. That white plume you see coming from our plant is nothing but steam and water vapor.”

There’s a public expectation that also figures into the equation.

“Do we have a God-given right to cheap gas?” Goodman asked. “We have to look at the bigger picture and take greenhouse concerns into consideration. The public doesn’t like heavy industry, but it likes our products. We need to communicate with people better in order to change that.”

The other refinery in the industrial area west of Ferndale has also changed names a few times over the years. It’s now the BP Cherry Point Refinery. Rick Porter is the business unit leader for the company. He’s spent 29 years with BP (British Petroleum), all of it in the US. He came here three years ago when BP acquired ARCO to help develop the company culture of distributed leadership. That entails high accountability and broad responsibility. Porter reports directly to an executive committee in London, which then reports to the CEO of the company.

“Heavy industry is not going away as long as people want the products we produce,” Porter said. “However, the regulatory environment here is so much more expensive and difficult than in other countries that it becomes hard to compete. We’re currently an importer of materials and an exporter of knowledge. That’s not sustainable.”

The state of Washington, in particular, is not an industry-friendly environment.

“In other states, regulators and legislators are beating on industry’s door,” Porter said, “asking, ‘What can we do for you? Tax breaks? Regulatory relief?’ Here, it’s an almost adversarial situation. We’re trying to create a partnership with a Canadian pipeline company that would result in a net reduction of water use and air pollution. It’s been three years and we still don’t have the permit. Meanwhile, the state pays the legal expenses of our adversaries. The EFSEC (Energy Facility Site Evaluation Committee) process doesn’t add much value from a business standpoint.”

Porter also cited taxation as a problem.

“This facility pays $39 million in state and local taxes,” Porter said. “That’s $10 million more than we would pay in Los Angeles. How can we compete with California under those circumstances?”

Power is not as big an issue for BP as it is for Intalco, but it’s still a concern.

“We’re not tied to BPA or PSE (Puget Sound Energy),” Porter said, “since we purchase power on the open market. We paid an extra $100 million for power during the recent crunch and basically made a moral decision to keep going. We’re the major supplier of jet fuel to SeaTac and the economic impact would be huge if we shut that down.”

The permitting process in this state also draws Porter’s ire.

“It took us ten years to get permits for our dock extension,” he said. “And even though we’re now using it, we’re still in litigation with environmental groups. That’s been about one-third the cost of the whole project. The dock extension actually reduces the risk of oil spills by reducing the number of ships waiting to offload.”

Porter remembers the bad old days of heavy industry and insists that things have changed.

“I grew up near Cleveland,” Porter said. “I remember the brown rain and the dirty snow. The image of those dirty Midwest and Eastern towns is what sticks in the public imagination, even though we’ve cleaned up our act greatly. If heavy industry was still like that, I wouldn’t want it here, either.”

The problems for heavy industry fall into four areas: taxes, power, the regulatory environment and public perception. Will they drive heavy industry out of Whatcom County? We’ll look at potential solutions to those problems next month.