The future of aluminium in Australia

The future of Australia’s ailing aluminium industry is being decided right now: not by the Morrison or Andrews Governments, but by global business climate risk management strategies, consumer mega trends, the fall out from China’s economic growth and even the threTheat of carbon trade wars.

How this plays out will directly impact hundreds of smelter workers in regional towns like Portland, Newcastle, Launceston and Gladstone. It will also accelerate the already chaotic disruption of domestic electricity markets.

Through the 20th century aluminium and electricity were symbiotically linked, both in production and consumption. Aluminium production is electricity intensive and its growth dependent on increased electricity supply.

Australia’s first smelter was commissioned in 1955 at Bell Bay north of Launceston, motivated by aluminium shortages during the second world war and reliant upon an over-supply of cheap hydro-electricity.

Five more smelters were built following the OPEC oil price shocks of the 1970s. Australia’s east coast coal fields were a cheap, low risk fuel source and the state-owned electricity utilities were enthusiastic participants.

Subsidised electricity was a vehicle for state development. More electricity meant more jobs. Coal fired power stations were built or augmented to supply new smelters at Portland, Gladstone and Newcastle. They were offered cheap, long term contracts to secure their investment.

At the time global demand for aluminium was growing rapidly. Strong and lightweight, it found uses in building materials, cars and aircraft, consumer packaging and computers.

The halcyon days of Australian aluminium began to fade at the start of the 21st century because of two factors: China and climate change.

China’s miraculous economic boom over the past two decades required creating jobs for millions and goods for them to buy. Since 2000 China built more than 100 new aluminium smelters and a fleet of mostly coal fired generators to power them.

China now supplies 55 per cent of global aluminium and exports its over-supply. It is a global price setter, although Chinese production is only weakly related to world prices. Aluminium prices spiked around 2017 when these Chinese government turned off some smelters and power stations to reduce air pollution.

It’s a tough market that has led to smelter closures worldwide. Port Henry and Kurri Kurri closed in 2014. The surviving Australian smelters needed cheap electricity to stay alive.

Instead, abundance turned to scarcity. Climate risk halted new coal fired power station development and then closures pushed up prices.

Alcoa’s Portland smelter had been protected by a long term electricity supply contract underwritten by the Victorian government in the 1980s. When it expired in 2016 the smelter was exposed to market electricity prices. The business hit the wall and had to be bailed out by governments.

Australia’s smelters have been squeezed not only by tightening domestic electricity markets, but their parent companies’ climate risk strategies.

Alcoa, Rio Tinto, Norsk Hydro and other major global aluminium businesses have started pruning their operations, culling high emissions smelters and prioritising hydro-based aluminium powered by water from the mountains of Canada and Norway and the rivers of Siberia.

Global consumer brands like Nestle, Apple and Toyota want to be able to use emissions-free metals in their products, and may be willing to pay a premium for it.

Differentiating “clean” aluminium from China’s high emissions product may also be a precursor to more regulatory intervention. The US aluminium industry is cheering on President Trump in his threatened trade war with China, while the European Union and some US Presidential candidates have started talking about imposing a carbon border tax on emissions intense imports.

Rio Tinto has been unsuccessfully trying to offload its Australian aluminium assets for the past six years. Last month Alcoa announced it would be pruning 1.5 million tonnes of smelter capacity world-wide. Portland is logically near the top of that list.

A Portland closure would have an immediate impact on the electricity market. Portland consumes about a third of the output of the Loy Yang A power station. In the short run prices would ease and reliability risk would improve.

This will also increase volatility. Coupled with increased intermittent renewables as committed by the Victorian government means the three remaining coal generators will be cycling up and down more frequently.

It’s this ramping effect that precipitated the closure of the Northern power station in 2016, and would probably do the same to Yallourn, the oldest and frailest of the remaining brown coal generators in Victoria.

That would leave a massive hole in Victoria’s firm supply that would need to be filled quickly: either local gas generators or the fast track of pumped hydro from NSW or Tasmania.

It might be a good idea if we started planning for these sort of eventualities. And soon.