AGL Energy backs aluminium smelter rescue in a post coronavirus environment
The Portland and Tomago aluminium smelters are struggling to compete internationally partly due to high energy costs.
AGL Energy has hinted governments will be reluctant to let the Portland and Tomago aluminium smelters collapse in a post COVID-19 environment and predicts domestic gas prices will jump from current lows as supplies start to get squeezed.
The power giant supplies electricity to Victoria’s under threat Portland plant and NSW’s Tomago facility, which have both suffered losses with the facilities struggling to compete internationally from high energy costs.
Alcoa’s Portland smelter continues to hang in the balance ahead of its existing power supply agreement expiring in mid-2021, while Rio Tinto’s jointly owned Tomago smelter is also under pressure as the mining giant races to sharply curb its carbon footprint.
Still, AGL said it was too early to consider closing either facility despite the market challenges and suggested governments may be reluctant to let big industry shut plants given the economic downturn.
“I think there’s a way to yet before we would get to a moment of shutdown. There’s a lot of discussion going on right now between ourselves, between the different owners of smelters that we’re linked to – Alcoa down south and Tomago in NSW – and governments both state and federal are actively involved in those discussions,” AGL chief executive Brett Redman told the Macquarie Australia conference on Tuesday.
“I think there’s a lot of water to go under the bridge particularly in an environment where governments are thinking very hard about what industry it wants to retain in the country as well.”
AGL supplies Portland from its Loy Yang A plant and Tomago from its Liddell coal facility which is due to close in 2022-23.
Portland’s future under Alcoa’s ownership rests on the negotiation of a new and cheaper power contract from 2021, complicated by the fact it takes most of its power from Victoria’s brown coal generators and Alcoa also wants to reduce its global carbon footprint.
AGL said it could handle any loss of the contracts from a company perspective but is confident closures are not currently on the cards.
“If change were to happen I think AGL’s portfolio would naturally balance in that we’re overweight in supplying smelters and it’s overweight at a price point that is historically low in the market,” Mr Redman said. “So while there might be some volume lost to the market, the volume we now have available can potentially trade at higher prices than what we’ve been achieving – albeit the pool market without that level of demand in the market may come off a bit.”
The power utility also expects low domestic gas prices will not last beyond the short-term and reflects the temporary redirection of supplies by LNG producers into local markets given weak Asian markets.
“These gas prices at this stage are relatively short term. For example, I’m not seeing longer term contracts being offered at these lower price points,” Mr Redman said. “We think the domestic market in terms of price is somewhat overshot. The reason for that is it is somewhat being driven by excess supply in the market by some of the LNG suppliers who are winding back. That can exist for a year or two maybe but eventually we’ll see the supply side response with capital programs being pulled by various producers. We’ll be looking to balance our way through that over the next few years.”
