It’s helter skelter for the smelters as aluminium prices fall

Energy Minister Angus Taylor and Member for Flynn Ken O'Dowd spoke at Boyne Smelter Limited about the need for reliable, affordable energy.

Aluminium is the new flashpoint in the energy debate. The industry is in a world of pain. It is not the first time, of course, but in Australia, could it be the last?

We hear that smelters both here and in New Zealand could close altogether. Processors and smelters face a perfect storm of depressed aluminium prices, thanks to oversupply and the Trump-China trade war, very high power prices, and pressure on the emissions front. And smelters are gigantic users of electricity. Ergo, the fate of aluminium therefore could have a huge impact on the grid.

Like steel mills, the sector has been part of the core of industrial manufacturing, and that means jobs, from Portland in Victoria to Perth and Gove in the far north. Like carmaking, aluminium has had a history of handouts from the government. In recent days both Rio Tinto and American giant Alcoa have warned about shutting up shop.

What do we know about aluminium? It is light, strong and a godsend in manufacturing — think aeroplanes. It is also the poster child for recycling. To make aluminium you usually start with bauxite rock, then you process it to make aluminium oxide or alumina and then you smelt it to create aluminium. Producing it can be a dirty business, but then so can the production of carbon fibre, its replacement. And both are heavy on carbon emissions.

In the last decade, China has dramatically upped its aluminium production with the growth in manufacturing. Aluminium prices have fallen over 40 per cent since April 2018 and are now wallowing at levels not seen since early 2017. Unfortunately for the sector, power prices have remained stubbornly high.

Ten days ago, Alcoa signalled that it could close Portland. It didn’t name the smelter specifically but the five-year transformation of its global portfolio aims to make it the lowest carbon emitter in the aluminium business. Eighty-five per cent of the company’s smelters will be powered by renewables. That strategy puts Portland, supplied by brown coal in the Latrobe valley at Yallourn, in the crosshairs.

In New Zealand on Thursday, there was another alert, this time from Rio Tinto. The big miner announced a review of its 80 per cent-owned Tiwai Point smelter in the South Island. Rio Tinto’s release said that its “strategic review will consider all options, including curtailment and closure and will be completed in the first quarter in 2020”. The bulk of Tiwai’s alumina supplies come from processors in Gladstone, Queensland. Note that the Tiwai smelter is powered by hydro-electric power, the greenest dispatchable power available. Rio Tinto’s concern is not emissions, but pressure on margins from its energy costs and low aluminium prices. This is where the other game of subsidies comes into play. There are millions of taxpayer dollars supporting Alcoa’s Portland smelter which are due to expire in just over a year’s time. In New Zealand, Rio Tinto has made it clear that it would be working with the NZ government to see “what could be done”.

The Tiwai smelter uses 12-13 per cent of New Zealand’s electricity but it also accounts for 6.5 per cent of the Southland’s GDP and employs nearly 1000 people. Rio Tinto is pushing hard for lower power prices from the main energy provider, 51 per cent government-owned Meridian. Part of that argument will be driven by the disproportionate share of transmission costs that the smelter is charged, but one gets the sense that the miner is after more.

In Australia, Rio Tinto has three smelters and two refineries and has been running up losses, a situation that boss Jean-Sebastien Jacques recently described as “not good”. Like Alcoa, the miner is also addressing emissions around the world. Rio’s giant smelters in Canada are powered by hydro, in stark contrast to most Australian smelters.

Shaking the grid

Closures, if they occur, will shake the grid. In Victoria, closing Portland could free up perhaps 10 per cent of available electricity. Then surely power prices would fall? That is the view of broker Macquarie in a note on Thursday, which suggested closures across the country could see national energy demand falling by as much as 12 per cent and that this could hasten the departure of coal-fired power stations. Even if just Portland were to close, the broker estimated that retail electricity prices would fall. “Forward prices may drop ~$5-7/MWh and savings for users would be as much as $600m, i.e. $20-30pa in retail bills.”

However, in a market which the Energy Security Board chair Kerry Schott famously described as anarchy, price falls are far from guaranteed. Prices could actually rise, depending on the impact of a smelter shutdown on the life of the coal power station supplying it. Portland accounts for about half of Yallourn’s business. It may be that Yallourn as a cheap brown coal supply could find customers elsewhere, but an early and abrupt closure of the power station would present a very tricky situation for governments, state and federal. Macquarie notes that “the secondary effect is the potential exit of coal capacity but given the three-year notification, at worst the industry has two to three years to prepare for such changes”.

Last week, Australia’s Energy Minister Angus Taylor wanted to make it very clear that Alcoa hadn’t specifically mentioned Portland in its announcement. The smelter employs around 600 workers and union officials are banging the drums. Given Alcoa’s new greening strategy and Portland’s reliance on brown coal, surely the smelter is at risk? “That is not what Alcoa has been talking about,” the Minister insisted. “They have been talking about the economics of aluminium smelting. That is understandable and that has been a global phenomenon.”

Coal-fired generators are concerned, asking the government for sufficient notice before a smelter can leave the national electricity market. “At the end of the day these are commercial businesses,” Taylor said. “The best way to keep aluminium smelters in the market is to make sure we have got a competitive, affordable, reliable wholesale market because that is the price they buy at, somewhere near to the wholesale price. The key is to make sure we have more supply which is dispatchable, there on demand in the market, and that is exactly what we are doing. In the shorter term, it is making sure that investment in the market does not prematurely close. Now we saw in Victoria the premature closure of Hazelwood, which was disastrous for the wholesale market.”

Don’t pick winners

On Friday, Origin chief Frank Calabria was urging governments not to pick winners. “We need to recognise that coal is the wrong type of generation to firm renewables and extending the life of old coal plants without a strong carbon signal will extend the uncertainty we are all facing today, while denying the inevitability of the low-emissions future we know we will need to deliver for our customers and the community if we are to minimise the impacts of climate change.”

That CEDA speech was met with derision by Taylor’s colleague, Resources Minister Matt Canavan, who tweeted: “I reckon we should do the opposite of what the big energy companies say because they are a big reason why we are in this mess. They have no interest in ending a mess that they make lots of money out of. So let’s build coal!”

As a nation, Australia can do little about aluminium prices. It can do something about input costs, and especially energy costs. Smelting may be at the greedy end, but the same is true for much of our industrial manufacturing. If projects like billionaire Sanjeev Gupta’s plans to power Whyalla’s steelworks with cheap renewable energy in solar and storage are successful, this may be a way to keep aluminium manufacturing in Australia in the longer term. It is hard to see coal in the mix. Indeed, given his recent French aluminium acquisition from Rio Tinto, Gupta could well be sliding the rule over some of Australia’s aluminium assets.