If you’re trying to make sense of Alcoa’s threats to close the Point Henry aluminium smelter near Geelong, you should start with the Grattan Institute’s 2010 report on the effects of the carbon tax on Australian industry.
Aluminium is one of the industries that gets the vast majority – 94.5%, initially – of its CO2 permits for free. Without this, the Australian aluminium industry would be unviable. However, with the free permits, even the Victorian smelters with their very high carbon intensity, are not hugely affected in the short term.
So what are the big cost drivers for the aluminium industry? Electricity prices, of which carbon pricing is only one component. Historically, the Australian aluminium industry depends on the heavily subsidised electricity supplied to Australia’s aluminium smelters by industry-hungry state governments in past eras. As Table 8.4 in the Grattan Institute’s report notes, if Australia’s aluminium smelters paid what the electricity is actually worth, they would go from largely being low-cost producers to being high-cost producers. In Victoria’s case, a deal was done between Loy Lang Power and Alcoa in 2010, which the state government of the time claimed didn’t involve the government continuing to subsidize Alcoa’s electricity beyond 2016.
As the Grattan Institute report put it:
Without electricity subsidies, Bell Bay and Kurri Kurri will become very high cost producers, and Point Henry will be vulnerable to swings in Aluminium demand, as summarised in Table 8.4.
While the subsidies don’t go away for a few years yet, the other factor affecting the competitiveness of Australia’s smelters – the Australian dollar – has certainly gone up dramatically. Thank you, mining industry! As noted in the past, one of the effects of taxing mining more heavily would have been to push the Australian dollar lower, helping other industries to remain competitive. Of course, friend of the workers Tony Abbott is dedicated to repealing even the watered-down mining tax we ended up with.
In any case, a quick reality check. Despite endless doom and gloom about the automotive, banking, and other Victorian-based employers, Victoria’s unemployment rate is 5.2%, marginally lower than the national rate of 5.3%. Jobs are disappearing in some industries. But, broadly, the Victorian economy is not doing too badly at all.
Let us hope this rapacious industry FAILS in its bid for yet more government subsidies. This must be one of the worst examples of policy failure in Australian economic history. Aluminium is the most common metal in the earth’s crust – there is nothing special about Australia’s bauxite deposits. Thanks to the subsidies, Australia produces about 1/3 of the world’s bauxite, 1/4 of the world’s alumina, but only 5% of the world’s aluminium. Why? Because after refining and smelting to take advantage of our give away energy price deals, most of Australia’s alumina is exported for all the downstream value adding. So this industry takes huge subsidies, generates very few jobs, then exports most of the profits. The subsidies equal about $70,000 per worker per year. Employment is claimed by the industry to be 12,000 full tiem jobs. Sounds a lot but that is less than one months average jobs growth. It also generates more Greenhouse gases than our entire road transport system. We are suckers to world aluminium. Climate change is a great opportunity to finally get rid of this turkey industry.
Sounds like the government should just pay each of those aluminium workers $70K to stay at home.
Let’s openly subsidise manufacturing (especially hi tech tertiary & renewable i.e. industries with a future) from a larger mining tax.
Given the forces keeping the dollar high, its only fair.
And yes, lets pick winners.
After all, this is how EVERY developed country (including Australia) became wealthy – without exception. and all those that didnt (again, without exception) have failed to become middle income countries.
Neoliberal ‘modernisation’ theory has been proven 100% wrong, time and again. Face it, and then dump it.
DI @ 2 – though should probably start with the car workers first who are subsidised around $160K/year! For both industries that’s a lot of job assistance and training money. Perhaps the government could wholly fund work in the environment industry for those workers are unable to find new jobs.
On the government figures the carbon tax (after subsidies) is equivalent to the Australian dollar moving about 1c against the US dollar so its effect is really quite minor.
By worth do you mean including the carbon price? I thought the smelters used a lot of off peak power which is worth very little if there’s no one around to use it consistently.
Scrap aluminium, either spun (pots and pans) or extruded (window frames) when taken to your local merchant gets about half of the London Metal Exchange current listed price for scrap. Cans have lingered around 90c a kilo since the GFC when they dropped from $1.50.
There is not a lot of incentive to recycle in those figures even allowing for your local dealer to take his cut. The is particularly so when you appreciate that only a fraction of the energy needed for the bauxite to alumina stage is needed to recycle scrap.
I agree with Socrates @ 1 on downstream value adding. If the industry were made to pay a market price for their electricity then they might get more interested in the recycling side.
Lefty E: if we’re going winner-picking, aluminium smelting is a decades-long loser, and Victorian aluminium will be an even bigger one in a carbon-constrained world.
Chris: no, that’s even before we take carbon pricing into account. Victorian power users and latterly taxpayers have been subsidizing the industry pretty much since its inception.
Agree Rob – as I said – hi tech, tertiary and renewables
Aluminum is none of those.
My point is theres a word for countries who don’t ‘pick winners’: developing.
More accurately, “being developed”.
Still more accurately, “being robbed”.
Poor!
It seems to me that industry policy in Australia at the moment isn’t about winner-picking at all – it’s about loser-picking.
I just wanted to clarify my opening rant. I am not against assisting industries per se, just ones like aluminium.
Aluminium is not a sensible choice of industry to subsidise. There are almost no economic benefits to Australia. For the same money we could employ a lot more people, with a much more benign environmental outcome, making wine, solar panels, new trains or whatever. This industry has had over 40 years to locate the really high tech processes in Australia, and has shown no inclination to do so.
The actual subsidy per worker was worked out at $74,000 per person per year by the Grattan Institute. That is all they could find out. FOI rules mean more assistance may remain hidden. This was quotd in Bernard Keane’s article on Crickey:
http://www.crikey.com.au/2011/03/10/aluminium-smelting-the-best-bang-for-your-fossil-fuel-subsidy-buck/
The problem with picking winners is that, in the real world, it is challenging to keep special interests from influencing the decisions, not to mention that its hard to decide what the winners are (until they are beyond needing govt support).
e.g. the winner-picking grant programs that have operated in Australia over the last 15 years have given us such “winners” as carbon-capture&storage, Manildra, and a couple of failed PV startups out of UNSW and ANU.
My take of the aluminium industry is that all of the plants has been paid for long ago so production should continue as long as an operating profit can be made.
My understanding of aluminium smelters is that they can operate successfully over a range of power draws. The lower limit is determined by the power required to keep the cell contents molten. There is no obvious reason why changes in demand cannot be made quite rapidly. (Disclaimer I have no expertise in aluminium smelting
This suggests that aluminium smelters could have a logical/valuable role in a smart power system that has to adjust to variations in demand and generation. (Most other industries haven’t got this flexibility – changing power draw has to take place in large steps and start-up and controlled shut down takes time.)
Perhaps we should take a closer look before demanding the shut-down of aluminium.
A few (small) counterfactuals in the pile-on against aluminium* smelters in Aus:
1. reportedly there are some hideously strong greenhouse gases (not CO2, but flourine based ones IIRC) that Australian smelting has gone a long way to reduce/remove, unlike most countries.
2. Aluminium is, as a lightweight metal, part of most future low-energy cars etc. It offsets steel as an alternative material – imagine the extra freight costs if cans were still ferrous. Structurally in the global economy, aluminium has a big future.
3. Bauxite is mined in Aus, there would be less shipping costs smelting it here rather than O/S.
* why the F*** can’t I ever seem to change from US english to Aus english on LP? Is there some template setting the admins could fix?
@wilful,
LP’s framework/template configures absolutely nothing with respect to versions of English used by commentors. There is no setting for that even if we wanted to. If something is happening within your browser’s spellcheck, then that’s a matter for you and your browser settings.
thanks tigtog, but are you really sure? The issue really seems to be unique to LP, for me and my browser. I go to a variety of US websites and have no problems posting in correct english, it doesn’t mark it as misspelt there.
@wilful, absolutely sure. Spell-checking is a browser-end function. Obviously there is something in your settings that is picking up on the fact that Jacques runs Ozblogistan on servers which are in the USA, but why it doesn’t do that for other US blogs you visit I don’t know (although I suspect that Jacques has probably configured all the server tags for everything absolutely properly according to current web standards, whereas other webmasters may not have done so, so your browser doesn’t get that information when visiting those sites).
However, if your spell-check is halfway decent, you should be able to configure it to over-ride locality settings so that it always use Brit Eng spelling. If you can’t, I recommend turning it off.
Our iron ore and coal mines are currently selling at prices that are multiples of the production costs. As a consequence, there is a worldwide rush to open new mines to take advantage of these extraordinary prices. It is worth noting that a significant percentage of the jobs being created in the mining industry come from the engineering and construction required to drive this expansion rather than any increase in the number of people required to operate the new capacity.
At some point supply will exceed demand and prices will move much closer to production costs. At this point there will be a serious contraction of export cash flows and the value of the $Aus will return to former levels..
We could quite easily find ourselves in a situation where we have allowed the manufacturing industry to contract and we lack the skills and equipment required to replace the jibs and income that used to come from the mining industry.
I don’t think we should be in a hurry to shut down industries at the moment just because the value of the $Aus is much higher than normal.
It is easy to point to places like Iceland that produce aluminium with much lower emissions/tonne than Aus. However, the world hasn’t got the potential for massive increases in clean hydro-power. We need to ask ourselves what effect closing the Aus industry would have and just how clean the aluminium produced to replace the Aus aluminium would actually be.
Also worth asking what could be done to make Aus aluminium cleaner (such as @13) without making production costs ridiculous.
Wilful and John D
Those questions were dealt with in the report I referred to. Australian aluminium produces more emissions per tonne than almost any other supplier. It is due to the brown coal sourced power, and old smelters. Yes they have improved, but they are still a long way from best practice.
Nobody suggests we should shut down the Bels Bay smelter in Tassie, that runs on hydro power.
So to answer John D’s question, if Aussie smelters closed, Chinese ones would produce less emissions. The economics of the industry here are hopeless. We have small tonnage smelters in each state, that are not worth modernising. Without cheap power, even ignoring ghg issues, they never would have been built.