Alcoa Inc said on Monday it plans to close its Portovesme, Italy, smelter and slash output at two Spanish smelters as the U.S. aluminum producer takes aim at its high-cost European operations.

Uncompetitive electricity prices and sustained low aluminum prices ton have pushed the plants into the red.

But the plan, which is part of the measures announced last week to reduce output by 12 percent by the end of June, will throw further doubt on the long-term future of Alcoa's embattled smelting operations in Europe.

Shuttering Portovesme, with a view to permanent closure, will remove 150,000 tons per year of capacity and will account for majority of the 240,000 tons, or 5 percent of Alcoa's global capacity, being cut in Europe.

The remaining 90,000 tons will come from curtailments at Spanish plants, La Coruña, with annual capacity of 87,000 tons, and Avilés, with 93,000 tons.

The cuts in Spain, which are planned to be partial and temporary, will not necessarily be evenly distributed between the two plants, a spokesman said.

The company will now begin the consultation process to close Portovesme permanently.

But it is likely to face strong opposition from the trade unions, which fought a ferocious but unsuccessful battle to save Alcoa's Fusina plant in 2009 and from the government which is waging its own war to save the country's troubled economy.

It's about time. They would have closed (Portovesme) years ago if they could have. It makes metal for a market that is totally oversupplied, said one trader on hearing the news.

The future of the Spanish plants is brighter than Portovesme, which has faced closure for several years already.

For Spain, it's a bit more positive. In terms of cost, Italy was the worst, said a source familiar with the plants.

With Portovesme, I think there were many factors coming together, the energy contract and it's a dirty smelter, Alcoa may be afraid of a new EU investigation, he added.

News that European smelters, the most expensive to operate in Alcoa's global asset base, would fall victim to the latest cost-cutting drive was not a surprise, particularly given the company's struggle to source energy at competitive prices in the region.

Doubt was cast on the region when the European Commission ruled in 2009 that energy tariffs agreed with the Italian government were illegal subsidies and launched a probe of its Spanish contracts.

Shutting Portovesme will mark the end of primary smelting for the company in Italy and leave Alcoa with only one smelter operating at full capacity in Europe -- the San Ciprian smelter in Spain with 228,000 tonnes per year of capacity.

Alcoa has appealed the Commission ruling arguing that competitively priced energy is key to the survival of its European smelters. Electricity accounts for a third of aluminum production costs.

But the closures come at a decisive time with power contracts for the Italian and Spanish smelters due to expire at the end of this year.

Traders expect the latest measures to be used as a bargaining chip in what will be fraught negotiations.

Its problems in Europe contrast with its experience in Saudi Arabia where power is cheaper and it is plowing over $10 billion into building a 740,000 ton per year aluminum smelter, a rolling mill, an alumina refinery and a bauxite mine with Ma'aden.

There's still doubt over the power contracts. Europe found against them in Italy and they're appealing, so technically there's a risk of them finding the same in Spain, said a second trader.

(The plants) are loss making. They'll be even more loss making if the subsidies are not there, he said.

Suspending primary output will force Alcoa to source raw material for its downstream operations in Europe from the open market or from its other smelters outside of the euro zone, such as in Iceland and Norway.

This is not the first shutdown in Italy. The company suspended operations at its Fusina plant alongside Portovesme following the commission's ruling in 2009.

Fusina remains shuttered, although Portovesme was reopened after hammering out a new power agreement in September 2010.

But these are Alcoa's first cuts to active capacity since the global economic crisis in 2008.

Last week, it announced it will permanently close its smelter in Alcoa, Tennessee, and two potlines at its Rockdale, Texas, smelter, representing 7 percent of the company's total capacity. That capacity has been idle since 2009.

The total employment impact from the Spanish and Italian measures will not be determined until consultations are completed. Current employment at the three plants is about 1,500 people, Alcoa said.

Alcoa made the announcement on Monday, just hours before the release of fourth-quarter earnings, which are expected to reveal a loss on the back of low aluminum prices and rising costs.

In addition to the closures and curtailments, Alcoa said it will take aggressive action to reduce the cost of raw materials and will adjust capacity across the company's global refining system to reflect internal demand as well as prevailing market conditions.

Alcoa stock rose 2.4 percent to $9.38 in afternoon trading on the New York Stock Exchange.

(Reporting by Steve James and Josephine Mason; Editing by Marguerita Choy)

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