Aug 18 2005

Aluminium Smelters Add Little to Iceland’s Bottom Line

Iceland Review

In its Tuesday daily bulletin, KB-bank says that the benefit that Iceland derives from aluminium smelters is small. The bank supports this view by claiming that the electricity is sold at close to cost and the rate of return for hydroelectric dams is low. It also says that the economical impact is overstated in the local discourse.

Alcoa graedir 


Ásgeir Jónsson, an economist at KB-bank says that this year it is more difficult to build the smelters and they constitute a massive investment. After the smelters start operations they do not make much use of local factors of production because the aluminium is imported. Ásgeir points out that at the aluminium smelter in Reydarfjordur there are between 400 – 500 jobs which is a small number compared to the 150,000 jobs in Iceland. He says that the benefit is primarily local [where the aluminium smelter is located]. KB-bank estimates that the benefit is ISK 8 billion value added in the east of Iceland. He explains that this is a substantial addition to the economy in east Iceland but the effect is small on the economy as a whole.

KB-bank says the low overall benefit is caused by low electricity prices that are close to cost, and this is reflected in the low rate of return of the state power company, Landsvirkjun, and the low rate of return that Landsvirkjun demands from its hydroelectric power plants.