The 10th CRU World Aluminium Conference, held in Reykjavik June 13, 2005.
Ladies and Gentlemen!
It is a great pleasure for me as Minister of Industry and Commerce to welcome you all to the 10th CRU World Aluminium Conference, which this time takes place here in Reykjavík. Someone may wonder, of all the beautiful, warm and comfortable conference places in the world, why on earth is the conference held up north in Reykjavík close to the Arctic Circle. The secret of the answer lies in these two words: power and aluminium.
I am not sure whether all of you are aware of the unique power situation in Iceland. The country is located in the middle of the North Atlantic Ocean with large annual precipitation, glaciers and rivers, which provide abundance of hydropower potential. Secondly, being located on the crest of the Atlantic tectonic rift zone, Iceland has access to enormous geothermal energy potential, which we have learned to harness to our advantage.
Both resources are environmentally clean and renewable and therefore very attractive for power intensive industry in order to reduce the greenhouse gas emission often attached to the power production.
Iceland is an island with isolated power system without linkage to outside power markets. Two third (2/3) of the total energy consumption comes from our own power resources. 90% of the population heats up their houses with geothermal hot water and the remaining 10% uses electricity for district heating. Electricity is used as the key source of power in business and industry, whereas fossil fuel consumption is mainly for the transport sector and the fishing fleet. About two third (2/3) of the total electricity generation goes to power intensive industry.
For almost 40 years primary aluminium industry has played a major role in the economic development of Iceland. The first aluminium smelter, ISAL, was commissioned in 1969 as a result of an agreement between the Icelandic Government and Alusuisse of Switzerland. Alcan of Canada now owns the plant. In 1998 a second aluminium smelter, Norðurál, was built by Columbia Ventures of USA, initiated by a legendary person in the aluminium industry, at least here in Iceland, Mr Kenneth Peterson. The plant is now owned by Century Aluminium of USA. Today the aluminium industry in Iceland produces some 270.000 metric tonnes of primary aluminium in two plants. Together with Icelandic Alloys which produces annually 120.000 metric tonnes of ferro-silicon, the energy intensive industry uses annually about 5.500 Gigawatthours of electricity.
This is as far as the current situation is concerned. Let me give you a quick look at the future prospects and possible development in the Icelandic aluminium industry within the next few years.
Alcoa is building a large greenfield aluminium plant, Fjarðaál, in East Iceland, which is scheduled to start production with 322.000 metric tonnes annually in 2007. Norðurál is expanding its plant at Grundartangi by 170.000 metric tonnes, to be commissioned partly in 2006 and again early 2009. By the end of the decade we will see the primary aluminium production increase to 760.000 metric tonnes annually, using a total of 11.500 Gigawatthours of electricity annually. Energy intensive industry will at that time consume about 80% of Icelands total annual electricity generation.
The emerging electric power demand is a challenge for the power companies. A number of new power plants and expansions of existing plants are under construction in order to meet this demand. Close to 1000 Megawatts of new power will be installed until 2009. The largest being the Kárahnjúkar hydroelectric power project in East Iceland, with 690 Megawatts of installed power. The remaining 300 Megawatts will be harnessed from geothermal fields near Reykjavík. I know that the power companies have invited the attendants of this conference to visit some of these power plants and I strongly recommend that you make the most of this opportunity.
It goes without saying that these large projects, which I have mentioned, will have enormous impact on the relatively small economy of Iceland. In this year alone, the total investment cost is estimated at 90 billion Icelandic kronas, which are about 10% of the Gross Domestic Product in 2004. Due to this, and the domestic demand, the economic growth rate is expected to be above 5% and the unemployment rate as low as 2.5% this year.
An old saying tells us that where there is lot of sunshine there is also lot of shadows. We are also seeing signs of the shadow sides of the booming economy such as increasing inflation, temporary negative balance of accounts and the difficulties for our export industries due to the strength of the currency. The Government is aware of the signs and is challenged to deal with these temporary issues.
Looking further ahead we are convinced that the positive impact on the economy due to the increased energy intensive industry will outweigh the negative one. We will see basic changes in the economic structure, a diversification, which makes Iceland less vulnerable to export fluctuations. What used to be the basic manufacturing export, namely the marine products, will reduce its share from 75% in 1990 to 45% in 2010, and will therefore be replaced by other industrial products. The total share of manufacturing export will be 30% higher than 20 years ago. The permanent impact on the economic growth is estimated to be 2% higher annually when the situation stabilises after the new investments, measured by the annual Gross Domestic Product.
As a result of the ongoing large investments in the aluminium industry, a number of renowned international aluminium producing companies have shown interest in investigating the possibility to build new smelter capacity in Iceland, including the ones already established in the country. New locations, suitable for medium size aluminium plants, have been identified and investigated in co-operation between the Government and Municipalities. No decisions have been made so far, and we will examine all opportunities prior to such decisions.
If it were only for the potential industrial sites and abundance of energy resources still to be harnessed, it would be technically possible to host a few more smelters. There are however limiting factors, which need to be studied and taken into account. I will at this opportunity only draw your attention to two issues to be considered.
For the first, I will mention the economic impact. We are already approaching a situation where the primary aluminium industry is coming close to the fishing industry in terms of foreign currency earnings. The main reason for diversifying the export industry is to seek economic stability by creating new pillars to support the future economy. As soon as a new pillar grows to be larger than the existing one, there is a danger of going from one extreme towards the other. Instead of improving the economic stability, we might create a new instability as a result of the fluctuating aluminium price. Establishing aluminium fabrication in Iceland, instead of more primary aluminium production, might counteract such development.
Secondly I will mention the environmental impact and the issue of the greenhouse gas emission. Iceland became signatory to the Kyoto protocol in 2001. We had cleaned up in our backyard by replacing the burning of fossil fuel with geothermal hot water for house heating already in 1990, the year, which sets the basis for the emission allowance according to the Kyoto protocol. Due to circumstances particular to countries with small economies and abundance of unused, renewable energy resources, Iceland managed to negotiate a special provision. The provision allows the emission of carbon dioxide on account of new energy intensive industry after 1990 to be as high as 1.600 thousand tonnes annually in average in the years 2008-2012. When the aluminium projects currently under construction come on stream by the end of this decade, we will have used up 75% of the special provision leaving only 430.000 tonnes of carbon dioxide allowance for a new project. This is equivalent to the production of approximately 280.000 tonnes of aluminium. No one knows what will happen after 2012, but international trading for unused carbon dioxide quota has already begun, which may open new opportunities for Iceland and investors.
Ladies and Gentlemen!
I hope that you will enjoy this interesting conference and that you will take home with you good memories and impressions from your visit to Iceland.