Iceland divided over aluminum's role in its future

Reporting from Grundartangi, Iceland— Part of the cure — or cause — of Iceland's spectacular economic meltdown sits here on a rugged fiord backed by frigid blue waters and snowcapped mountains.

It's a massive aluminum smelter on the harbor's edge, sprawling over a few hundred acres. Owned by Century Aluminum Co. of Monterey, Calif., and fueled by geothermal energy and hydropower, the plant churns out nearly 300,000 tons of aluminum a year, to be shipped to customers around the world.

When Iceland's economy collapsed in 2008, pushing the country to the brink of bankruptcy, production here and at two other smelters continued, which helped keep exports alive through two years of painful recession. Now a budding economic recovery is underway, and Iceland is on track for a faster return to sustained growth than other debt-ridden nations in Europe, such as Greece or Ireland.

But that has only stoked a fierce debate over how big a role aluminum production should play in the future of this sparsely populated island. The metal already accounts for about one-seventh of Iceland's entire economic output.

It's a bitter fight pitting pro-business groups against environmental activists and others suspicious of the industry.

Lured by low energy costs, foreign aluminum companies are eager to expand operations. Their supporters say that large-scale investment projects are vital to spur economic growth and create jobs.

But such plans alarm those who not only warn of irreparable damage to the environment but blame Iceland's ardent embrace of "Big Aluminum" for causing the country's financial troubles in the first place, by igniting an unsustainable economic boom.

If the expansion plans are approved — two new plants are under discussion — what was traditionally a nation of fishermen would be on its way to becoming one giant aluminum smelter in the North Atlantic, critics say.

"We're going too fast in a short time," said Andri Magnason, a writer and filmmaker who is highly critical of the industry. "We're putting all our eggs in one basket."It's a basket that has grown to remarkable size, compared with other parts of the economy, in the last decade.

Iceland's oldest aluminum smelter was established 42 years ago, but up until 2000, aluminum never accounted for more than about 3% of gross domestic product, on average.

That changed when the government began aggressively courting metals companies and approved construction of two large plants. By 2008, Iceland was producing about 870,000 tons of aluminum a year, virtually all of it destined for buyers abroad. That year, aluminum exports eclipsed fisheries exports in value for the first time in the island's history.

The smelting companies import bauxite, the raw material for aluminum, from countries including the U.S., Ireland and Australia; bauxite is not mined in Iceland itself.

But smelting it here allows Iceland, with its many rivers, waterfalls, hot springs and volcanoes, to exploit its own natural resources by supplying the aluminum plants with hydropower and geothermal energy at competitive prices. Otherwise, there would be no market for all the clean energy Iceland is capable of producing.

"We are based in the middle of the North Atlantic Ocean. We are not connected to the mainland Europe grid," said Bjarni Mar Gylfason, chief economist for the Federation of Icelandic Industries. "So we export energy in the form of aluminum."Iceland's three smelters now consume at least five times as much electricity as all 320,000 of the country's residents. The plants provide jobs for about 1,400 people.

Environmentalists acknowledge that by using clean energy, the plants in Iceland pollute less than coal-fired smelters in other countries. But they warn that the aluminum companies are extracting heat from the Earth faster than it can be replenished. Although the subterranean heat is virtually inexhaustible from a global perspective, digging too many wells to tap into the hot water and steam, without allowing enough time for nature to renew the supply, can deplete a local site over time.

"They have presented it … like it's endless. Just drill a hole and everyone can get some," said Magnason, the filmmaker, whose documentary "Dreamland" sharply criticizes the aluminum industry in Iceland. "It's not like that."He and others suspect officials of offering sweetheart deals to the aluminum firms. The electricity rates that the state-owned power companies have offered the smelters have not been publicly disclosed.