Century Aluminum Co (CENX) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2011 earnings call. At this time all lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded.

I will now turn the conference over to your host Shelly Lair. Please go ahead.

Thank you, Kathy. Good afternoon everyone and welcome to the conference call. Before we begin I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations, including our expected future financial performance, results of operations, and financial conditions. These forward-looking statements involve important known and unknown risks and uncertainties which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statements disclosure in today's slides and press release for a full discussion of these risks and uncertainties.

In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today's presentation and on our website at www.centuryaluminum.com. I would now like to introduce Logan Kruger, Century's President and Chief Executive Officer.

Thanks, Shelly. Thank you all for joining us today. So, let's get started on slide number 4. Market conditions continue to improve during the last several months, with the price of economic activity increasing in most regions. China, India and Brazil continue to post robust results. Which have led to growing concerns related to overheating and actions by these governments to attempt to reduce inflationary pressures. We continue to note a consistent and now seemingly serious effort on the part of the central government in China to rein in the expansion of the aluminum sector. These programs have in the past produced mixed results as capacity continued to be bolstered without approvals from the central government. As you would guess, it remains to be seen whether those programs will produce more tangible results. But I would note that the frequency and the seriousness of the governments communication has been increasing.

I would also point out the obvious political activity taking place across much of the Persian Gulf and the Middle East. In addition to China and India, these regions have represented significant growth in primary aluminum capacity during the recent past. Continued instability in this part of the world could have further dampening effects on the growth of supply.

Despite substantial inventories around the world, physical metal remains tight in many regions. Financing transactions play an obvious part in perpetuating this condition as do the logistics of removing metal from warehouses. Both of these factors are subject to dynamic influences and we are watching them carefully. Primary aluminum production continues to be subject to persistent cost pressures, the largest of which relates to the price of oil. Mike will detail the impact that this trend has and will continue to have on all of us. Wayne will provide detail on our operations during the past several months . So, I will make just a few brief comments.

In summary, I am pleased with our recent performance. Safety and productivity performance has been good. We have progressed on several important projects such as the restart to the front potline at Hawesville and the re-installation of the transformer at Grundartangi which was damaged last year. Wayne will detail a few firsts and starts that we are experiencing with the line at Hawesville restart, but these are typical and we are confident we will get to them during the next few months. We are moving forward with modest, but high impact and low-risk, investment programs at both Grundartangi and Hawesville. I will comment at the end of our remarks on the on status of the Helguvik project.

Let's move on to slide number 5. The alumina cash price averaged $2,500 per ton in the first quarter of 2011. The highest quarterly level since the third quarter of 2008. Prices are currently above $2,700 per ton. The recent strength in pricing is being driven by a variety of factors, including the improving demand, a weak dollar, high energy prices, and a strong investor sentiment towards all commodities. Aluminum spot prices remain firm over the quarter and are in the range of $410 to $420 per ton. This market is forecast to remain in balance in the near term with prices around these current levels.

Aluminum demand remains strong in Europe and North America, due primarily to the continued improvement in the transportation sector. In China, demand remains strong driven by the continued infrastructure spending and urbanization. Both India and Brazil are also expected to drive aluminum demand as the construction and industrial sectors continue to grow in these regions. In addition, the aftermath of the recent Japanese earthquake remains a concern for demand in the short term. Activity is expected to quickly recover as reconstruction begins to accelerate within this country. We may note that a similar impact in the US due to the recent widespread infrastructure damage caused by tornadoes may have a similar effect.

China finished the quarter with 9.7% year-over-year growth in GDP and with a year-over-year industrial production growth of 14.4%. GDP in India grew at 8.2% year-over-year in the fourth quarter, consistent with recent performance. Inflationary pressures in both of these regions and their governments monitor policy actions, and response thereto, will remain a key area of focus as this is considered to be a significant threat to global economic recovery.

Why don't we move on to slide number 6. On the supply side, the most viable capacity in China that was idled in quarter four of last year was restarted as expected in this first quarter. The Chinese government has become increasingly vocal in its efforts to clamp down on over capacity in the aluminum sector and is denying authorization for new projects. While we see this as a positive step for the aluminum industry, we view this with some skepticism, given similar attempts in the past that have had limited success. We continue to see China in the net balance position to a modest net importer of metal in the future.

Political risks and unrest in the Persian Gulf and Middle East may also challenge aluminum supply growth, as these regions are expected to be primary growth vehicles outside of China. We anticipate considerable capacity growth from these regions in the near future. Certainly with respect to well advanced projects and expansion of existing facilities. The longer-term, this unstable environment may deter [in due] investments. Alumina prices continue to be supported by the supply and demand dynamics, as well as the meaningful shift in the gullible cost curve, principally driven by the price of oil. This can be seen from the chart on the slide. After many quarters of pricing inconsistent with its historical relationship to inventories, this does indeed appear to be a fundamental change and not just an anomaly.

We can now move on to slide number 7. Inventories are currently at about 58 days of global demand. A combination of chief capital and the forward contango continue to attribute to additional financing deals. We closed in [minus] and the key elements of that drive the economics of these financing deals and as least in this near term to term interest rate environment, we anticipate that these transactions will continue. We continue to see volatility in the near term contango and are currently experiencing a bit of a squeeze. But, low interest rates remain supportive about our financing deals.

Even when financing deals do start to unwind, there is another mitigating factor due to the logistical constraints of moving metal in large quantities out of warehouses. With the current daily volume requirements, we believe the impact of any unwinds will be substantially muted by the price of which metal can physically leave the warehouse. As a result, the alumina market is currently experiencing a period of physical tightness and premiums in the US Midwest, Europe and Japan are all at, or near, record levels despite the substantial inventory overhead. I would like to now pass this on to Wayne to talk about the

Thank you, Logan. Let's turn to slide number 8. As Logan summarized, the operations have performed generally well in 2011. As always, safety is a key value and I'm pleased to report the performance at the plants continues to improve. This is an area which we strive to progress continuously and I'm pleased to see that safety is being embedded into everything that we do.

On our last call I discussed the progress made with the investment programs at Hawesville and Grundartangi. To update, the initial work on the capacity feat program at Grundartangi is progressing. This phase includes modification to the rectifiers with the provision for redundancy, installation of a larger anode, and upgrades to the routing room. The timeline for the completion of phase 1 is mid-2012. Mike will remind you of the budget cost during his discussion.

At Hawesville, we energized the first cells in line 5 at the end of the first quarter. We are methodically starting sales according to the process stability. With the confluence of new people with no previous experience, and the restart of line 5, there has been a subsequent operational challenge affecting production and output from the balance of the plant. We expect the plant to be substantially on track by the end of the second quarter and producing at full capacity in the third quarter. Mike will provide a comparison of Hawesville production in quarter one to what we expect in quarter two. The upgrade of Hawesville's high voltage control systems, which support the plant capacity creep, continues. When completed in the fourth quarter, average across all potlines will be increased with a subsequent increase in metal production. As noted in our last discussion, Mt Holly's performance has continued to improve. Safety, operation, production and cost performance are all nearing the form of excellence for which Mt Holly has been noted.

Let's turn onto slide number 9 At Ravenswood, you will remember that we are working with all constituents and stakeholders in West Virginia to formulate a power contract that would allow us to reopen the plant. As we have detailed, we would require an arrangement that would protect the plant in times of low metal prices. We had a strong coalition of partners working to get a bill through the state legislature during the 2011 session that would have supported a power contract of this type. Unfortunately, it failed to be approved. Though disappointed with the result, we continue to work with the power providers, the Governor's office and other interested parties to create a pathway to achieve an enabling power contract.

On the market front, just a few comments as Logan has covered most of the key points. The Midwest premium is at an all-time high due to a combination of building economic activity and the lack of readily available material. A growing business confidence is coming from a more diverse range of end markets. Our plants are sold out and continue to receive inquiries, especially for high period products. With that, I will turn it over to Mike who will review the financials.

Thanks a lot, Wayne. If we could tie it turn to slide 10 please. As Logan said, we are very pleased with the results this quarter. They came in better than we would have expected and better than the modeling assumptions that we provided to you in February would have predicted. Our realized prices were up 6.5% quarter to quarter. As usual I will make all my comparisons on a sequential basis, so here obviously Q1 over Q4 2010. So, realized prices up 6.5% sequentially, which is consistent with the quarter-to-quarter rise in the comp and one-month lag to LME quarter to quarter.

Talk a little bit about volumes. If you have had a chance to look at the volume and realized price data that comes at the end of the financial information that follows the earnings release. This quarter, like the last couple of quarters, some of the business done in Iceland we have done on a direct basis, but 3,900 tons of those direct tons were Iceland. So, on that basis, making that adjustment, if we look at the sequential growth in shipments on a per-day basis, there were two less shipping days this quarter than in the fourth quarter last year. Domestic shipments on a per-day basis were down about 2%. Iceland was about flat quarter to quarter.

On the production side, the results were up a little bit. Both domestic and Iceland production on a per day basis were both out. So, we but just a little bit of inventory this quarter which will wash out over the next couple of quarters. To talk a little bit more about volume. Wayne took you through his assumptions for the restart of the reduction in sales in line 5, which is progressing well. So, let me give you what we expect here for the next couple of quarters in terms of shipment volumes based on the rollout of those new reduction sales in line side with Hawesville. Then, obviously based on the rest of the Hawesville plant, and Mt Holly and Iceland.

I will start domestic. We see shipments up between 6% and 7%, Q2 over Q1. And then Q3 over Q2 up an additional 7% to 8%. So, just to repeat, Q2 over Q1 domestic shipments up 6% to 7%. Q3 over Q2 domestic shipments up 7% to 8%. And Iceland obviously not as much growth given that Grundartangi, as you know, is producing and has been well above its rated capacity on the order of 275 kilotons annualized capacity. Nevertheless, in Q2, we are looking for between 1% to 2% growth over Q1. In Q3, up about another 1% over Q2.

Okay, let me get back and talk about the reported results in the first quarter 2011. Starting at the top of the income statement data, net sales on a US dollar basis were up 3% quarter to quarter. Again, as I just said a couple of minutes ago, the first quarter had two less days than the fourth quarter of 2010. Moving on down, gross profit was up $1 million on a $10 million sales increase quarter to quarter. Let me take you through a couple of the components of that.

Our realized prices to our gross profit up $19 million in the quarter. Those costs that are directly linked to the aluminum price. That is obviously the cost of our alumina and powered Grundartangi were up $5 million quarter-to-quarter. But Logan and Wayne referenced raw materials, this is mostly carbon-based materials, obviously based on the price of oil, were up $7 million quarter to quarter. That is absolutely consistent with our expectations. Again, if you go back to those modeling assumptions we gave you in February, you will see that we had in there some large increases in carbon that we would have expected, and those are embedded in the operating cost numbers that we put in those slides as well. We came in right on top of those.

US power costs were up $2 million quarter-to-quarter. The Hawesville line 5 restart had a one-time cost of about $6.5 million as you saw in the earnings release. And other costs were generally favorable this quarter. We had a very good quarter in terms of expense management and productivity. Moving down the income statement, that up other operating expense, just to remind you, that's where we account for Ravenswood given it's curtailed status. As we reminded you in February, we were expecting some accounting gains relating to the change in retirement benefits at West Virginia. That was $9 million as you saw in the earnings release and we expect that same amount for Q2 of this year, and then we will be done with that. So, if you back that out of that number on the other operating expense line, you will see the actual expense was about $3 million. Right on top of our expectations.

Moving on down, less than forward contracts $5 million. That is largely non-cash obviously. Goes without saying that if the aluminum price goes up the value of the put options go down. No change in our tax status. Just looking quickly at the tax provision, just to remind you, in the US we provided a 0% rate . That, obviously, is based on our large balance of the preferred tax assets that are fully allowed for. Iceland we booked at the statutory rate of 18%. As you saw in the earnings release, we had a $2 million benefit item in the tax line related to the retirement benefit change at West Virginia. Turning to the bottom of the income statement data, you will see average diluted shares, common shares in the quarter of $93.3 million. In addition to that, there were 8.2 million deferred shares out there in the quarter.

If you could turn just briefly to slide 16, towards the back. As normally, I'll take you through the ins and outs on the EPS that are described in the first paragraph of the earnings release. So, as you see and consistent with, obviously, the income statement data, the reported GAAP results and net income on common is $0.25. That is obviously the portion of net income that is applicable to the common shares-- divided by the common shares. When you divide the total net income by the total common first shares, you obviously get the same results. Obviously, you allocate the income on a pro rata basis to become in a preferred; it's $0.25. And on that total share basis, that 101.5 total common and preferred shares. We talked about all these items, but just to go through them quickly. The loss on the puts, again non-cash, $0.05. The accounting for the in the retirement benefits at Ravenswood's, $0.09. Tax benefit related to that, $0.02. And the one-time restart costs for the lines of Hawesville, $0.06.

Just a couple of quick comments on the balance sheet before I move along. Not much to report this quarter. Cash, including a couple million dollars of restricted cash, stood at $297 million at the end of March. As I said, no other real items to talk about during the quarter. I would note that just after the quarter in the middle of April, you have noted that we filed an 8-K and we have called for redemption of the remaining $48 million principle amount of our convertible notes. That process concludes on May 19. Just to give you a sense of why we did that, as you remember, those notes were puttable at par in cash by the holders in August of this year.

So, we called them a little early principally for two reasons. One is we can begin now to enjoy the interest rate arbitrage, obviously, we weren't earing and aren't earning 175 basis points on our cash. Just as important, those of you familiar with these processes, generally when bonds are put, you get some bonds that are stuck in peoples drawers and otherwise, so you don't get them all back. And for that reason, calling them here will avoid the administrative cost and hindrance of having a couple of bonds remaining outstanding. So, again, $48 million of cash will go to that call and that will conclude in the third week of May.

Just a couple of cash flow items before I move on. CapEx for quarter, as you have seen if you have taken a look at the cash flow data, was $3 million. Wayne mentioned the improvement programs ongoing at Hawesville and Grundartangi on schedule. Just to remind you, and we put this, obviously, in the items in February, we budgeted $10 million to $15 million for those programs in aggregate for this year and we are still on that budget. In addition to that, we have our normal and customary $15 million for maintenance CapEx. We are still on that budget for the year. And lastly I would note, spending for Helguvik for the quarter $4 million, consistent with estimate that we have given you, that we should spend on average about $1 million to $1.5 million per month pending the restart of the major Helguvik activity at the projects.

Okay, if we could back please and go just briefly to slide 11. To just give you a sense of the ins and outs of the movements of cash for the quarter. If you see the first large item on the tax side. We did some tax planning in Iceland this quarter. And in concert with that, paid an inter company dividend. Under Icelandic law, you provide a withholding-- or you pay a withholding tax when you do something like that. So, we paid $27 million to the taxing authorities. We get that right back, the same amount, in the fourth quarter of this year, so it's just a timing issue.

As we estimated for you in February, we made a pension contribution this quarter. You see the $11 million there, we actually spent $15 million in cash this quarter on pension contributions. That $11 million is the amount in excess of the amount that ran through the income statement. And again as we advised you in February, we will spend a few million dollars more on pension contributions through the balance of 2011. Again, I know we've talked about these other items; Hawesville line 5 restart one-time cost of $6 million, closer to $6.5 million actually. And the price we did buy some stock options for the first half of 2012, that was a $4 million item in the first quarter of 2011.

Just to move on to slide 12 please, very quick comment on cash flow. We had very good cash flow performance this quarter as you can see. To remind you, this is absolutely consistent with the sensitivity we provide you in the past. Just to remind you, every hundred dollar movement in the LME moves our cash flow on an annualized basis in the range of $35 million to $40 million and if you do the math you can see the movement here, or the increase was right on top of that. And with that I would like to turn it back to

Thanks, Mike. Per my earlier comments, resources conducive to the development of a competitive primary alumina business are becoming increasingly rare. In this regard, we remain convinced that Helguvik will be an attractive long-term investment for our shareholders. The economic environment in Iceland has continued to along a path of slow improvement. The political picture remains complex. We, like other Icelandic and non-Icelandic companies with significant commitments to the country, are hoping that certain recent developments, such as the rejection of the second settlement of the ice save dispute will not put this recovery at risk.

The Helguvik project is economically important for Iceland, and thus enjoys widespread support amongst its stakeholders and other constituents. In this environment, we continue aggressively to pursue the restart of the project. The arbitration process with one of the power suppliers is nearing its end. Regrettably, we may be forced to engage in a similar process with the other power supplier. Higher up, we continue to engage in good faith discussions with both companies and are hopeful that we can arrive at a mutually satisfactory outcome, and thus restart a major production activity before the end of this year. And with that I would like to say, Kathy, can we take some questions.

(Operator Instructions) Our first question comes from David Gagliano with Credit Suisse .

I actually just wanted to focus in on the Ravenswood discussion for just a second. Can you just expand a bit on some of the major sticking points in terms of the power contract, and given where the aluminum price is now, what are your thoughts with regards to timing of bringing Ravenswood back on?

David, this is Logan, I will make a few comments. Thanks for your question. First of all, obviously I think in our last call we said that we didn't expect to restart in this year. I think that was our comment. And Wayne may want to add and Mike may want to add to it.

Obviously, what we are looking for is a contact for power for some period of time that we want to the longer length of time. That will give us protection or a competitive positioning that lower and weaker markets. I think that is really where we wish to be. There was some discussion around this and in the finance committee of the Senate this did not pass.

But, we still have good support for this and obviously we will continue to look at other ways of progressing this. With your comment as to what the LME is, obviously we look as part of the restart of Ravenswood along the term period of alumina to recoup both our financial and our other contributions to restart in this block. I don't know Mike or Wayne, any other comments?

I think you summarized it.

No, Logan said at the end of his comments, that David as you know, you need to, in your analysis, be sure that you can, based on reasonable assumptions, earn back those restart costs. Some of which get back at the end of time because there are working capital base, some of which you don't. They are one-time costs. So, that is kind of the math that you need to do. And the math will continue to do as we look to solve this thing either later this year or in a different way.

And what would, just a rough estimate, what would the restart costs be? I think you mentioned them before, I just don't remember what they are.

Yes, David they are upwards of $50 million, maybe a little bit more, of which sort of half ish is working capital and the rest is non-working capital, actual level would cost some costs.

Okay. Thanks very much.

Our next question is from Brett Levy with Jefferies & Co.

You mentioned something about put options for 2012. Assuming you don't have Ravenswood significantly ramped up during 2012, approximately what portion of North American production do you currently have hedged for 2011 and what is your target hedge level for 2012? As a percentage of total?

Sure, Brett. We look at it just as a definition before I give you the numbers, when you say that the denominator in your question, the percentage of production. The denominator we use is what we call, I think we've talked about this before, is the unpriced tonnage.

Unpriced in our definition is those tons that are not already hedged by a natural hedge. In this case the link is to the alumina price. So, in that space, using that as a definition for the dominator. This year we are just a little bit under 50% and thus far, for the first half of 2012, we are at about 25%. Nothing but yet for the second half of 2012.

You basically have got 50% of the first half of 2012?

No. 50% of all of 2011 and 25% of the first half of 2012.

I get it. The first half of 2012.

You got it.

And clearly these are put options, so it is downside risk leaving the whole upside available to us.

And I'm sure we are going to get -- or we are going to get to we-continue-to-evaluate-our-options question. You guys are coming up on a call date on your notes. The capital markets are wide open and fairly (Inaudible).

Obviously, you guys want to own as much of Helguvik as you possibly can. Are you guys looking at some options in terms of taking out the bonds and perhaps replacing it with a larger issue to even sure up liquidity further?

Two comments, Brett. First is, you answered your own question before you asked it, so I will leave it at that. As you would hope, all kidding aside, we are looking at this hard because, as you said, the market is good, both in respect of absolute yields and spreads for companies with credit profiles like ours.

The only other comment I wanted to pick up on is the one you said about Helguvik, I mean we said at least for the last 4 quarters, maybe more, Logan, that our absolute and full intention is we will own 100% of Helguvik. There is no intention at all to sell down, either in the first phase or otherwise, any portion of the ownership of Helguvik. Logan, I do not know if you want to add.

I think that's correct. Good, Mike, that you made that point. And I just want to go back to the put options. Obviously we evaluate what we see in the market and as you have noted in our prior quarters and maybe the one before, we believe that this market is improved substantially, you noted through my comments today, and the economic indicators are supportive of this market doing well.

Obviously, the premiers, both as you see in the Midwest and Europe and elsewhere, are indicating that the demand for metal and the immediate availability of metal is not that easy. So, we have moved on to being obviously positive on the market.

All right. And then I'm going to come back to Helguvik. Could you talk about sort of what the major impediments are and sort of what the time table might be to kind of get this plant sort of beyond the shell construction stage? And, obviously you guys are talking about power costs, you're trying to build relationships. Just give a little bit deeper dive in terms of what the next few steps are going to be and what the challenges are going to be to get Helguvik to the next few stages?

I think I will just summarize our comments from the last few quarters. Basically it revolves around finalizing our discussions with the 2-part providers, as simple as that. Our capital costs we know, the engineering we know, the operating permits and environmental permits, those are all in place.

It is simple and very clear that we need to come to terms with our partners, our power providers on the contracts that were placed, put in place in 2007 and then went through, obviously, the financial crisis. So, that is the situation. We are already in that process and as we have commented before, we went to arbitration with one of the power providers and we hope that will go through the process in the next few months.

So, we will keep you apprised of that, but that is the only impediment to continuing and to moving forward on a major start of our reconstruction. We have a good team in place. It is the same team, or some of the team that does the work at Grundartangi and I think all things are ready to go, subject to finalizing our positions with our power providers. Mike, can you comment?

And the arbitration board is supposed to rule when? Is there any way we can follow the events a little bit?

I think we will keep you apprised as we move forward. Obviously, that is obviously going to happen in the near-term. We will see one arbitration board in this quarter, but you cannot determine the timing of those. So, we will obviously let you know since you have any more details.

All right. Thanks very much guys. I will get back in the queue.

Thank you. I appreciate the call.

We then will go next to Sal Tharani with Goldman Sachs.

Logan, you mentioned about the logistical impediments of bringing this inventory out of the LME because of the rules. These rules have been around for a long time, is that correct?

Correct.

So, in the past when we have inventory destocking, I have not been covering aluminum for a long time, but how was that path? Was it also a slow bleed into the market?

I cannot really talk to that because my period in aluminum is not sufficient to cover that, but yes it took a while for that to bleed out into the market.

Okay.

And that's another factor, of course, it depends on whether people want to release the metal that may be tied up in financing deals.

For that to happen, you either have to go to back degradation or (Inaudible). Is that correct?

I think it is a number of elements and I think we mentioned them in our comments, 1, interest rates obviously. Other is contango. And what people see as the cost of carrying that forward and making some return on it.

Great. And one last thing, if you look out over the next few years, between the alumina and aluminum market, how do you think these 2 will progress in terms of supply demand balance? Where do you think there will be more tightness?

I think it's a good question. I think let's put the discussion of the inventory to 1 side, having just covered that. I think the market is moving forward with the demands on an increase. The ability of the additional production outside of China is very limited.

And I think that all commentators are talking about 2012, maybe early 2013, that the market will turn into a deficit. Obviously, that is dependant on how quickly the demand accelerates, but certainly what we see in our areas that we work with, we see demand picking up. As Mike I think and Wayne commented, we are completely out at all our plants and we have people knocking on our door, particularly for high purity.

So, that is a good indicator of the base demand. And I think obviously the aluminum side is reasonably balanced against the market. But, it is certainly an interesting dynamic there as you know with the index on pricing. We will see how that plays out.

Great, thank you very much.

Thanks, Sal.

(Operator Instructions) We have Tony Rizzuto with Dahlman Rose.

I have a couple questions. Logan, I would like to ask you about, obviously a lot of information, a lot of mixed information coming out of China, and you indicated serious efforts. We see some of the provinces looking as if they are going to try to remove some of that redundant capacity and yet we are also seeing other indications where in the western parts of the country, they are talking about adding a tremendous amount of capacity.

I wonder -- I appreciate your comments and always your insights on the market, but how do you see this playing out? Do you really believe that this time is different? We have seen a lot of rhetoric over the years and what gives you the confidence level that things might be a little bit different this time?

Yes, thanks Tony for the question. I think in my prepared notes, didn't display any confidence in us at all, in fact I think I said we shall see. But I did note, Tony, on the other side of this, that the messages are a lot stronger and more consistent and a lot wider stretch as well.

And I think, we shall see. And I actually commented last quarter we do believe that a lot of the restarts will start in the first quarter, and that has really happened and there is some more to come. But demand has picked up in China, as you know. (Inaudible) and will new capacity will be bolstered at a rate that keeps up with demand. And I think that is the real question that you are trying to ask.

And this is just another equation in that. We also note the planned production increases or new plant building in the western areas. But, some of that will be offset by some of the areas that won't be economic. Power prices in China, as you know, are going to continue to go up. And I think over time this will play out in a positive way. That is my view.

When you see that, Morgan. I heard that question I think that Sal asked, and I thought it was a good question, and to me it was a critical question, in looking at the various markets. In my view, I think the raw material markets could be a limiting factor on China going forward. And I'm wondering if the way that you see this playing out, I know that you are going to observe how these markets play out, but does this expedite, in your view, the need to -- I know you have the contracts going out and I believe the contracts the first phase really does not come off I believe until 2013, maybe second half, but does this give you a greater sense of urgency to have a little bit, certainly, more of a natural hedge as you look out further from a stand point of backward integration?

Yes, I think backward integration means going upstream, is that we said Tony?

Yes, yes. And obviously into the mining and refining.

Absolutely. We have always said that on a project basis if it makes sense, that's the way for us to go. We have also said clearly we would not be an interested party in going downstream. We have maintained that position and as you know, we have a early stage project in Jamaica, Coleman Sanko, with a partner and that will obviously progress on its route and determine whether it is a viable project or not.

All right, Logan. Thanks very much.

Thanks, Tony.

In queue, we have next we have a question from Lloyd O'Carroll with Davenport & Co.

Yes. Do you have any uncommitted high purity out of Hawesville at this point? Since there are only to smelters in North America with that purity? And I'm thinking of the Japanese rebuild of the power grid and the necessity for that purity for a conductor.

Yes, that is a good question. I think I have to just honestly say that one of my colleagues said we sold out.

We sell all we make.

And it is a slight inventory build in the first quarter, but by the major it's a small amount and we are sold out. And we have ongoing inquiries for more high purity. And we have certainly see from one of our large customers, the demand for conductivity material, which is part of your question Lloyd, there has been a stronger demand for that material.

Okay, thank you.

Thanks, Lloyd.

Thank you. We have no further questions gentlemen.

Well thank you very much to everyone. We look forward to talking to you again in the near-term. Thanks very much, Kathy.

You're welcome. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.