Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price and Raw Material Costs Sensitivities
Aluminum is an internationally traded commodity, and its price is effectively determined on the LME plus any regional premium (e.g. the Midwest premium for aluminum sold in the United States and the European Duty Paid premium for metal sold into Europe) and any value-added product premiums. From time to time, we may manage our exposure to fluctuations in the LME price of primary aluminum and/or associated regional premiums through financial instruments designed to protect our downside price risk exposure. From time to time, we also enter into financial contracts to offset fixed price sales arrangements with certain of our customers (the "fixed for floating swaps").
We are also exposed to price risk for our raw materials which are the largest components of our cost of goods sold. Certain of our raw materials are purchased based on published market prices. As a result, our cost structure is exposed to market fluctuations and price volatility. Because we sell our products based principally on the LME price for primary aluminum, regional premiums and value-added product premiums, we are not able to directly pass on increased production costs to our customers. From time to time, we may manage our exposure to fluctuations in our alumina costs by purchasing certain of our alumina requirements under supply contracts with prices tied to the same indices as our aluminum sales contracts (the LME price of primary aluminum).
Market-Based Power Price Sensitivity
Market-Based Electrical Power Agreements
Sebree has a market-based electrical power agreement with Kenergy and Century Marketer LLC ("Century Marketer"), Century's wholly-owned subsidiary that acts as a MISO market participant. Under this agreement, Century Marketer purchases electrical power on the open market for resale to Kenergy, which then resells the power to Sebree at MISO energy pricing, plus transmission and other costs incurred by them. See Item 1. Business - Key Production Costs - Electrical Power Supply Agreements for additional information about these market-based power agreements.
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Power is supplied to Grundartangi from hydroelectric and geothermal sources under long-term power purchase agreements with three separate suppliers - HS, Landsvirkjun and OR. These power purchase agreements, which expire on various dates from 2026 through 2036 (subject to extension). The power purchase agreements with each of HS and OR provide power at LME-based variable rates for the duration of these agreements. The larger Landsvirkjun agreement provides for fixed rate with an additional variable rate linked to the LME.
From time to time, we may manage our exposure to fluctuations in the market price of power through financial instruments designed to protect our downside risk exposure.
Electrical Power Price Sensitivity
Given our market-based power supply agreements, we have electrical power price risk for our operations, whether due to fluctuations in the price of power available on the MISO power market or the price of natural gas or other inputs. Power represents one of our largest operating costs, so changes in the price and/or availability of market power could significantly impact the profitability and viability of our operations. Transmission line outages, problems with grid stability or limitations on energy import capability could also increase power prices, disrupt production through pot instability or force a curtailment of all or part of the production at these facilities. In addition, indirect factors that lead to power cost increases, such as any increasing prices for natural gas or coal, fluctuations in or extremes in weather patterns or new or more stringent environmental regulations may severely impact our financial condition, results of operations and liquidity.
The consumption shown in the table below reflects each operation at 100% production capacity and does not reflect production curtailments.
Electrical power price sensitivity by location:
Sebree Mt. Holly Grundartangi Total
Expected average load (in megawatts ("MW"))
385 400 543 1,328
Annual expected electrical power usage (in megawatt hours ("MWh")) 3,372,600 3,504,000 4,756,680 11,633,280
Annual cost impact of an increase or decrease of $1 per MWh (in millions) $ 3.4 $ 3.5 $ 4.8 $ 15.9
Foreign Currency
We are exposed to foreign currency risk due to fluctuations in the value of the U.S. dollar as compared to the Iceland krona ("ISK"), the Euro, the Chinese renminbi, the Jamaican dollar and other currencies. Grundartangi’s labor costs, part of its maintenance costs and other local services are denominated in ISK and a portion of its anode costs are denominated in Euros and Chinese renminbi. We also have deposits denominated in ISK in Icelandic banks, and our estimated payments of Icelandic income taxes and any associated refunds are denominated in ISK. Vlissingen's labor costs, maintenance costs and other local services are denominated in Euros. Further, Jamalco's labor costs, maintenance costs, and other local services are denominated in Jamaican dollars. We also have deposits denominated in Jamaican dollars in Jamaican banks and our estimated payments of Jamaican income taxes and any associated refunds are denominated in Jamaican dollars. As a result, an increase or decrease in the value of those currencies relative to the U.S. dollar would affect Grundartangi’s, Vlissingen's and Jamalco's operating margins.
We may manage our exposure by entering into foreign currency forward contracts or option contracts for forecasted transactions and projected cash flows for foreign currencies in future periods.
Natural Economic Hedges
Any analysis of our exposure to the commodity price of aluminum should consider the impact of natural hedges provided by certain contracts that contain pricing indexed to the LME price for primary aluminum. Certain of our alumina contracts and a substantial portion of Grundartangi’s electrical power requirements are indexed to the LME price for primary aluminum and provide a natural hedge for a portion of our production.
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Risk Management
Any metals, power, natural gas and foreign currency risk management activities are subject to the control and direction of senior management within guidelines established by Century’s Board of Directors. These activities are regularly reported to and reviewed by Century’s Board of Directors.
Fair Values and Sensitivity Analysis
The following tables present the fair values of our derivative assets and liabilities as of year-end 2025 and 2024 and the effect on the fair value of a hypothetical ten percent (10%) adverse change in the market prices in effect at December 31, 2025 and 2024. Our risk management activities do not include any trading or speculative transactions.
Asset Fair Value Asset Fair Value with 10% Adverse Price Change
2025 2024 2025 2024
Commodity contracts (1)
$ 1.9 $ 4.5 $ 1.6 $ (3.7)
Foreign exchange contracts (2)
— — — —
Total $ 1.9 $ 4.5 $ 1.6 $ (3.7)
Liability Fair Value Liability Fair Value with 10% Adverse Price Change
2025 2024 2025 2024
Commodity contracts (1)
$ 66.0 $ 4.4 $ 92.0 $ (0.2)
Foreign exchange contracts (2)
— — — —
Total $ 66.0 $ 4.4 $ 92.0 $ (0.2)
(1) Commodity contracts reflect our outstanding LME and MWP forward financial sales contracts, fixed for floating swaps, HFO price swaps and Indiana Hub power price swaps.
(2) Foreign exchange contracts reflect our outstanding FX swaps and the casthouse currency hedges.
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