Saving Iceland

Icelandic Economy Suffers as Century Shareholders Make Record Profit
By Jaap Krater

As inflation rates in Iceland soared to 8.7% and the Icelandic krona lost a third of it’s value, US-based Century Aluminum started construction of a much disputed aluminium smelter at Helguvik, southwest of the capital Reykjavik. The Icelandic economy is suffering from overheating as billions are spent on construction of new power plants and heavy industry projects. The central bank raised the overnight interest rate to a whopping 15% to control further price increases as Icelanders see their money’s value disappearing like snow. It would seem that the last thing the tiny Icelandic economy needs is further capital injections.

But Icelandic investors are making record profits from the new projects. The value of shares sold to them by Century less than a year ago to finance the Helguvik smelter has increased by 33%, though the company has not made a profit in years. Read More

The Iceland Nature Conservation Association claims that the National Power Company will incur a loss of between ISK 20-30 billion through its investment in the Kárahnjúkavirkjun dam project in east Iceland. The calculations are based on figures released by the National Power Company in a reviewed profitability assessment for the dam. Morgunbladid online reports.

In a press release, the Iceland Nature Conservation Association states that it has often “criticized the negative rate of return of the Kárahnjúkavirkjun dam and in particular how low the requirements by the National Power Company (the owners) are for its investment to return a profit”.

The Iceland Nature Conservation Association bases its calculations on the Weighted Average Cost of Capital being 8-9 percent, as is considered “normal and natural based on market criteria.” Read More

3 March 2006
Iceland Review

Icelandic National Broadcasting Service, RÚV, continues to report on public reaction to the announcement earlier this week of a memorandum of understanding between Alcoa and the Icelandic government concerning a feasibility study for a new aluminum smelter near Húsavík.

RÚV quotes professor of economics and director of the Economics Institute at the University of Iceland, Tryggvi Thór Herbertsson, saying that the Icelandic economy is unable to handle all the projects currently being planned.

In addition to Alcoa’s proposed new smelter, Alcan and Century Aluminum are also reported to be interested in adding capacity to their existing operations in Iceland.

Other proposed state-sponsored projects include a new hospital in Reykjavík and a new road from Reykjavík to Kjalarnes, the so-called Sundabraut.

According to RÚV, Tryggvi Thór said that “nobody thinks we can carry all of [the proposed projects] out at the same time…that would be far too much.”

Jón Bjarki Bentsson at Íslandsbanki’s research department said to RÚV that if the smelters are built other export industries would run into trouble. He also said that the Icelandic economy was flexible and had adjusted well in the past, both to downturns and upswings. If the projects were to move ahead, Icelanders could expect high interest rates and a high exchange rate, said Jón Bjarki.

Iceland Review

The required return on investment of the hydroelectric power plant at Kárahnjúkar was too low said Ágúst Gudmundsson, chairman of Bakkavör on the current affairs program Kastljós (Spotlight) Tuesday, according to the Icelandic Broadcasting Service, RÚV. “I would have preferred that the money had been spent in a different way,” he said. Read More

In his reply the Prime Minister, Mr. Asgrimsson, implied that opposing the destruction of nature for multinational aluminium corporations amounted to “wanting to ban a religion”.

Mr. Ásgrímsson’s answer may explain why most MP’s and ministers don’t listen to scientists’ and other professionals’ warnings and ignore the outcries of people who are losing their jobs and companies which are going bankrupt as a result of the unhealthy expansion of the small Icelandic economy, directly caused by the gargantuan Kárahnjúkar project.

But now we know, it’s a question of faith!

Prepared for the Iceland Nature Conservation Association
Thorsteinn Siglaugsson MBA
Reykjavik 2002

Extract

Introduction

Landsvirkjun, the state-owned electric power company in Iceland has for some time been planning a large hydropower plant in the area north of Vatnajokull, Europe´s largest glacier in the east of Iceland. The facility would be built to produce electricity for a 390,000 ton aluminium smelter in Reydarfjördur on the east coast of Iceland.

Until recently a consortioum of Icelandic banks, pension funds and the Norwegian company Norsk Hydro planned to build and run the Reydarfjordur smelter, a prerequisite for initiating the Karahnjukar project. Early 2002 Norsk Hydro decided to postpone its final decision on the project. Subsequently the Icelandic government decided to seek other investors. In september Alcoa and the government signed an agreement to take up talks to build a 295,000 ton smelter in Reydarfjordur run on electric power from the Karahnjukar plant.

According to a previous study conducted for the Iceland Nature Conservation Association the Karahnjukar plant would not be financially viable when valued based on market rates of interest and return on equity expected for a comparable project. As a state owned company Landsvirkjun does however enjoy full financial backing from the state of Iceland and is able to borrow at sovereign rates. The Sumitomo Mitsui Banking Corporation prepared an assessment of Landsvirkjun´s plans in September 2001 confirming that the project could support the cost of capital demanded by Landsvirkjun based on Landsvirkjun´s estimate of future power prices.

There are considerable differences between the current and earlier plans. The size of the power plant is different as well as the expected investment. The buyer profile is different which no doubt has an effect on interest rates and the construction timeline for the Karahnjukar plant is considerably shorter according to the current plans.

This report aims to compare the financial characteristics of the earlier plans for the Karahnjukar plant with the current plans. This includes an analysis of buyer risk profile, estimate of probable power price based on current and forecasted aluminium prices and the constraints provided by the general cost structure in the aluminium industry.

Read the report here or on the original site