COVID-19 is an unlikely smelter saver

The COVID-19 pandemic has smashed the global economy as the movement of millions is curtailed to slow the spread of the virus. This has had a material impact on energy markets, causing the worst oil price crash in history as demand from aviation and transport collapsed, taking gas and electricity markets with it.

Before the pandemic hit Australia’s aluminium industry was in a slow but terminal decline. Two of the six smelters (at Kurri Kurri and Point Henry) had closed and in 2017 Alcoa’s Portland smelter in Victoria received a $240 million rescue package from State and federal governments to stay open. That deal expires next year and was unlikely to be renewed.

Until COVID-19. Australia’s ageing aluminium smelters at Gladstone in Queensland, Tomago in NSW, Bell Bay in Tasmania and Portland had little to look forward to faced with rising electricity costs, high emissions inputs (except for Bell Bay which runs on hydro) and soft global aluminium prices caused by China building more than 100 new smelters this century.

Global aluminium price, LME, 2010-20 Source: Tradingeconomics.com

Rio Tinto had been trying to offload its Pacific Aluminium business (which includes big shares of Gladstone, Tomago and Bell Bay) since 2012 without finding a buyer, and earlier this year announced it would be closing its hydro-fuelled Tiwai Point smelter in New Zealand.

The future for aluminium producers like Rio and Alcoa appears to be in making higher value zero-carbon aluminium for consumer brands like Apple and Volkswagen. That is hard to do when most of the electricity contracted comes from coal fired generators.

The renewables-led transformation of the Australian electricity sector has been driving the accelerated closure of coal generation which has increased scarcity of cheap, firm generation needed to run aluminium smelters profitably.

For the past year Rio Tinto at Portland and AGL have been trying, unsuccessfully, to negotiate a new electricity supply deal for the smelter from 2021. Rio is now looking to other bulk electricity generators like EnergyAustralia and Alinta to supply its 510MW load.

EnergyAustralia has the most to lose from Portland closing as this big drop in demand will almost certainly bring forward the closure of its ageing Yallourn coal fired power station in the La Trobe Valley. This early closure could have material reliability impacts on Victoria.

The COVID-19 pandemic has done two things. First it has helped deliver a halving of wholesale electricity prices power the past year, and second it has created a renewed political imperative to protect existing jobs and create new ones. The idea of one or two more smelters closing now is far less palatable politically than it might have been a year ago.

Tomago has twigged to this new political power and has gone back to the market to try and improve the terms of its supply contract, also with AGL. The Federal Government has signalled its political support for continuation of aluminium smelting in Australia by including low emissions aluminium as a priority technology pathway in its Technology Investment Roadmap.

That’s all very nice, but on its own it won’t turn the dial on contract negotiations right now. Of course if it was serious the Federal Government could always direct its own generator Snowy Hydro to supply these smelters and clean up their emissions intensity in the process. It would be a loss making exercise for Snowy, but may be befitting its new role as the government’s agent in the market.