Iceland Municipality Votes Against Alcan Plant Expansion

Residents of a small Icelandic municipality just south of Iceland's capital Reykjavik voted at the weekend against a planned $1.2 billion aluminum smelter plant expansion by Canadian aluminum maker Alcan Inc. (AL), which owns the plant.

The no vote by 50.3% of residents in Hafnarfjordur, a municipality of 25,000 people, carries broad implications for both Iceland's economy and for Alcan, the world's second-largest aluminum maker, which has signaled it might leave the plant.

"The project would have changed the economy dramatically," said Ingolfur Bender, a Reykjavik-based economist at Glitnir Bank. "The result means that the economy will cool down more rapidly than otherwise," he said, adding "interest rates will come down more rapidly now."

Iceland is just coming through a period of high growth, boosted by recent aluminum plant investment of about $3.75 billion from U.S. aluminum companies Alcoa Inc. and Century Aluminum Co. (CENX).

Economic growth jumped to 7.2% in 2005 from 2.7% in 2003 largely as a result of aluminum company investment, prompting 18 interest rate hikes since May 2004 by Iceland's central bank to the current record high of 14.25%.

But growth slowed to 2.6% in 2006 as the projects concluded. Inflation has slowed to 5.9% in March from 8.6% in August and is expected to continue slowing.

Iceland's central bank kept rates steady Thursday, but signaled it would begin cutting rates this year as the economy stabilized, provided no new aluminum industry projects were started.

Alcan, which worked for eight years on the expansion, said to Dow Jones Newswires before the vote that if the expansion wasn't approved, the company might leave the plant.

"If the expansion won't go through, we see that as the beginning of the end of the plant," Alcan Iceland plant information director Hrannar Petursson said Thursday. The company wasn't available for comment, but is set to release a statement later Monday.