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Cablegate: Iceland: Local Vote to Stop Smelter Expansion May Have

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R 301727Z APR 07
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RUEHSM/AMEMBASSY STOCKHOLM 0148

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TAGS: EIND EINV EMIN ENRG SENV IC
SUBJECT: Iceland: Local vote to stop smelter expansion may have
silver lining for U.S. firms

Ref: Reykjavik 411

1. (U) Summary: Iceland's oldest aluminum smelter, owned by
Canadian aluminum conglomerate Alcan, was denied permission to
expand in a tight local referendum on March 31. The planned
expansion was one of three aluminum projects in various planning
stages, including two new smelters proposed by American firms Alcoa
and Century Aluminum. Although environmentalists may seize on the
results as a boost for their anti-aluminum campaign, in reality the
result of the vote is likely a positive sign for the U.S. projects.
The economy could not sustain all three projects, but it needs some
of them. The U.S. projects enjoy local public support and are not
located in areas with the same urban development issues. End
Summary.

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Enlargement would constrict town's growth
-----------------------------------------

2. (U) The Alcan aluminum smelter was opened in the town of
Hafnarfjordur, on the southern outskirts of Reykjavik, by Swiss
Alusuisse in 1969 and sold to Canadian Alcan in 2001. Originally
begun as a 30,000 tons/year operation, the smelter has been expanded
several times and currently produces 180,000 tons/year. The planned
expansion would have boosted the production capabilities to 460,000
tons/year, making it the biggest smelter in Iceland. During the
last thirty years the population in Hafnafjordur expanded from 9,500
to 23,200 residents. Alcan employs some 500 workers, who live in
Reykjavik and nearby municipalities.

3. (U) The main debate regarding the expansion revolved around how
the expansion would not only cause the smelter to reach very close
to existing residential areas in Hafnarfjordur, but would also block
any further town expansion. Dilution zones (the amount of area
needed surrounding the plant to absorb emissions) were widely
debated; Alcan maintained that due to new scrubbing technologies the
dilution zone would be smaller after the expansion than before.
Opponents said the air pollution and environmental damage caused by
expansion would reduce significantly the standard of living, as well
as real estate prices, in the area. Pro-expansion arguments
included the dramatic increase in the municipality's income from the
smelter and the positive effects on employment and industry. In
addition, the CEO of the Alcan smelter, Rannveig Rist, told the
media that if the vote went against the expansion Alcan would
probably close down.

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Lost by 88 votes
----------------

4. (U) Due to perceived widespread opposition to the expansion
within the municipality and a lack of unity within the town council
itself, the council decided a few months ago to put the decision
before a referendum. All polls leading up to the March 31 eQction
day indicated an extremely close vote, with both sides taking out
full page newspaper ads and direct mail marketing of residents to
persuade the vote. Voter turnout was very high; of 16,647 eligible
voters, 12,747 came to vote, or 76.6 percent. The expansion lost by
a mere 88 votes, with 6382 of the voters (50.35 percent) casting a
"no" ballot versus 6294 votes (49.65 percent) on the other side.
The result was a great disappointment for Alcan and CEO Rist told
media that there was "no existing plan B" for the smelter and
without the expansion there might not be grounds for continuing
operations in the long run.

-------------------------------
Environmentalists claim victory
-------------------------------

5. (U) Environmentalists celebrated the result of the vote as a
victory for the environment and Steingrimur J. Sigfusson, Chairman
of the Left Green Party, claimed that it reflected the rising
environmental consciousness of Iceland. Activists and the green
political parties told the media the vote showed that the people of
Iceland have had enough of heavy industry projects such as aluminum
smelters and the power plants that are built to power them. While
this vote was a local referendum in Hafnarfjordur, and a very close
call, Sigfusson claims that this is a far bigger victory for the
environmentalists than the government is willing to admit.

----------------------------------
U.S. companies likely not affected
----------------------------------

6. (U) Two other aluminum smelters in Iceland are owned by U.S.
firms (reftel). Century Aluminum in the southwest near the town of

Akranes has a production capacity of 220,000 tons/yr and Alcoa in
the northeast, which begins production in June, will have a capacity
of 346,000 tons/yr. Both Century and Alcoa have expressed their
intent to build new smelters in Iceland; Century plans a new smelter
near the old U.S. military base in Reykjanesbaer, and Alcoa wants
one near Husavik in the north. Both projects have the support of
the respective local residents, but face opposition from
environmental groups and green minded political parties who strongly
oppose further big-scale industrial projects in Iceland. According
to Gunnar Haraldsson, the Director of the University of Iceland's
Institute of Economic Studies, the economy could not sustain two new
smelters and the Alcan expansion, but it needs one or two of the
projects to sustain the growing economy.

7. (SBU) Of the two U.S. projects, the Century project is further
along. Century has submitted an Environmental Impact Assessment
which is open to review by the municipalities involved, the National
Planning Agency, the Environment Agency, and the general public.
Proposed changes to the local development and zoning plan have been
submitted by the town council of Reykjanesbaer, which supports the
project, and the plans are now open for public comment. Century has
signed an energy contract with the Sudurnes Energy Company for the
first stage of the smelter, due to be operational in 2010, and is
currently in negotiations with Reykjavik Energy for the purchase of
energy for the second stage. (Note: The Century project is on the
same part of the electrical grid as the Alcan smelter. With Alcan's
expansion plans off the table, Century has stated to the media that
it is willing to purchase all the energy that was to be sold to
Alcan for the expansion. End Note.)

8. (U) The Alcoa project is not as far along in preparation. That
project seems to face far more opposition on environmental terms,
because it is to be built in a more pristine area and the firm is
already unpopular due to negative publicity surrounding their
current aluminum smelter and the Karahnjukar hydropower project that
was built for it. The Alcoa project entered the third phase of its
feasibility study on April 18. The parties to the original
declaration of intent for the smelter, Alcoa, the Ministry of
Industry, and the municipality of Husavik, all agreed that the
feasibility studies were promising thus far and should be continued.


9. (SBU) Comment: Environmental activists have heralded the
Alcan/Hafnarfjordur vote as the first step towards a halt to heavy
industry's growth in Iceland, and hope to use that momentum to sweep
the current government out in national parliamentary elections on
May 12. It is not clear, however, that voters nationwide will make
the same calculations as Hafnarfjordur residents when they head to
the polls. The outlook for U.S. firms' plans is fuzzy, but not
automatically negative. Local sentiment in Husavik, for example, is
far more pro-smelter than the overall feeling in Hafnarfjordur. If
the next Icelandic government continues the current GOI policy of
devolving authority to town councils on such matters, the vote in
Hafnarfjordur may not have any impact on Century Aluminum's or
Alcoa's plans. End Comment.


VAN VOORST

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