Nickel shutdown a wake-up call on risk of going green

BHP's Billiton Nickel West Kambalda mine.

The Goldilocks view that Australia’s economy will make a seamless transition from supplying the world with fossil fuel energy and iron ore to the resources and products needed to sustain a global green transition is being tested by reality.

Confirmation on Thursday that BHP is writing off the value of its Western Australian nickel operations and considering shutting them down must be a wake-up call that Australia’s prosperity is not preordained.

It follows the wind-down of Alcoa’s Kwinana alumina refinery south of Perth at a cost of $650m a year to the WA economy. Meanwhile, steel producers are being paid hundreds of millions of dollars in government subsidies to keep them in business in a carbon-constrained world. Aluminium smelters are under intense pressure, and rising energy prices are starting to translate into less industry and higher unemployment more broadly.

The latest data from the Australian Securities & Investments Commission shows almost 1650 manufacturing and construction businesses plunged into insolvency in the six months to December. Figures released on Thursday show unemployment rose to 4.1 per cent in January, a two-year high.

The outlook is compounded by the rising cost of energy, the fragile nature of the national electricity grid, the financial demands of an ambitious carbon abatement policy, increasing regulation, and the trading practices of our major competitors.

As the Western world begins to shutter its heavy industry, most notably in the former European powerhouse of Germany due to an absence of Russian gas, China in particular is going full steam ahead with coal-fired power.

At the same time, China is exploiting its near monopoly on the rare earths and minerals that underwrite green technologies in a way that makes opening new deposits uneconomic.

Overly optimistic assumptions about the future price of commodities such as nickel and lithium are leading to billions of dollars in losses as markets shift to new deposits in places such as Indonesia that do not have the same labour and environmental regulations as competitors such as Canada and Australia.

The closure of BHP’s Nickel West operations would be an effective death knell for the Australian nickel industry, given BHP operates the country’s only nickel smelter and also controls the only Australian refinery.

The big picture is that governments must reassess the feasibility of inflicting ever higher costs and greater regulations on the industries that underwrite today’s budgets and spending on the expectation they will be easily replaced.

The call this week for a special levy on energy production and imports to raise $100bn a year to be spent underwriting unspecified industries of the future is a measure of just how disconnected from reality that debate has become.

Both major parties have rejected the suggestion floated by well-known economists Ross Garnaut and Rod Sims, but not the Greens. It is unfortunate the identities of those funding the research that recommends a big new tax on energy were not made public given the high stakes involved and the fact that funds raised would largely be paid as subsidies to those promoting new industries.

Prime Minister Anthony Albanese visits the BHP Nickel West Kwinana Nickel Refinery.

Australia is accelerating its green ambition at a time when governments across Europe are pulling back in the face of public revolt against the cost and inconvenience of what policymakers have designed and implemented.

The result of the upcoming election in the US is likely to have a major bearing on what the green future will look like after November.

Governments, both state and federal, must take note of what is happening in the boardrooms where investment decisions are being made about what will happen years into the future.

Squandering energy security and imposing new penalties on coal, gas and other products deemed less desirable by the socially demanding will have long-term economic consequences.

The evidence of this is already apparent. But the fruits of the energy transition, in particular, are less obvious.

Lithium and nickel are the essential metals for a battery-powered future that has been promised. But world markets are not designed to protect the status quo. The evidence is there that Australia is not always able to compete with cheaper supplies from elsewhere. This is a worrying development that must not go unnoticed.