Australian aluminium outgunned by cheap, coal-free global rivals

Alcoa’s decision to close the Point Henry smelter, at a cost of almost 1000 jobs in Geelong and elsewhere,

comes amid a perfect storm buffeting Australia’s aluminium industry.

Point Henry will be the second of Australia’s six aluminium smelters to close, after the demise of Kurri Kurri in

2012.

Implications for the industry, its workers and local communities are grave, and the situation is piling pressure

onto state and federal governments already reeling from the shrinkage of other Australian manufacturing

sectors. Where did it all go wrong?

A formerly world-class industry

The aluminium story weaves together three distinct plots. The first is one of an industry based on world-scale

bauxite deposits, that built what were once world-class refineries and smelters, and at its peak employed more

than 17,000 people. However, raw reserves are never enough and the Australian industry has seen the global

sector change around it, with economies of scale achieved by offshore competitors throwing down a tough

cost challenge.

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The second plot is a classic study in government industry assistance that was once seen as sound strategic

policy, but now looks like just another subsidy for an unsustainable industry.

The third and most recent plot revolves around the global challenge of climate change that means an

electricity-hungry product like aluminium becomes a villain in countries where electricity generation is

particularly emissions-intensive.

A question of competitiveness

Aluminium is produced in two stages: first, bauxite ore is refined into alumina, and this alumina is then smelted

to produce aluminium. Alumina refineries tend to be located close to the resource, and Australia’s refineries

are generally well-located and commercially competitive. The recent exception is at Rio Tinto’s Gove refinery

in the Northern Territory, which will close this year after struggling with a move from high-cost oil to an

alternative such as gas.

For Australia’s smelters, the logistics are different. The raw material, alumina, can be transported relatively

cheaply around the world. Aluminium smelting uses huge amounts of electricity, so the cost of that electricity is

a key factor in the competitiveness of a smelter. Although China dominates global production, Australia has

been among the top five producers in recent years.

When Australia’s smelters were built they benefited from very cheap, long-term electricity agreements with

government-owned power companies. These smelters were paying around half to two-thirds of the price paid

by other large industrial electricity consumers. The result for aluminium producers was they could be in the top

half or even the top quarter in terms of global cost-effectiveness.

In recent years, there have been big – and generally bad – changes. First, global aluminium prices have been

sliding since early 2011, threatening the viability of those producers that were struggling to keep costs down.

Second, liberalisation of Australia’s electricity market has meant the end of subsidised power contracts.

Market-based electricity prices push even the best-performing of Australia’s smelters out of the top 25% of

global competitiveness.

The impact of carbon pricing And then there is climate change. With the exception of Bell Bay in Tasmania,

which uses hydro power, Australia’s smelters produce 15-20 tonnes of carbon dioxide per tonne of aluminium

because their electricity comes from fossil fuels, mainly coal. This is two to three times the global average. A

carbon price of A$20-30 per tonne has a noticeable impact.

Around the world, newly-built smelters have used gas, hydro, geothermal or nuclear power, with low or near-

zero emissions. New production has also been targeted to places such as the Middle East, Canada and

Iceland with lower electricity prices because there are relatively few alternative uses for the electricity.

This means that arguments to protect Australia’s aluminium from carbon pricing, based on the idea that the

emissions will leak to another country, are likely to be wrong. The emissions may well be driven overseas by

cheaper pricing, but those emissions are also likely to be significantly reduced as a result.

Together, these factors drive Australia’s smelters into the bottom 25% of global competitiveness.

A bleak future With two of Australia’s six smelters now gone, what are the ramifications if the other four follow

suit? For the electricity sector, which is already under pressure from falling demand, losing a customer base

representing around 15% of the market would be a big blow.

As the global aluminium market further evolves and climate change policies become serious, the viability of

aluminium smelting in Australia looks challenging. There are clear consequences for a sector that directly

employs around 4,500 people and generates some A$5 billion in exports.

An intriguing alternative picture was painted by the 2008 Garnaut Climate Change Review. A long-term

positive future could emerge for aluminium production in Australia if rising carbon prices drive a low-cost,

emissions-free electricity supply sector in Australia.

But in the context of current climate change politics, with carbon pricing set to be repealed and the Renewable

Energy Target now under review, this prospect seems frustratingly far away.

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