Aluminium, industry policy and losing our way on reform
The debate about whether the closure of the Norsk Hydro Kurri Kurri aluminium smelter is because of the carbon price is one of the more ludicrous try-ons by the opposition. But more importantly, it misses the point about where the aluminium smelting industry, which only employs about 5000 people but generates — at least in normal years — $5 billion in exports, is headed.
First to the carbon price. In 2010, the Grattan Institute looked at the level of compensation for several industries under a carbon price. Its conclusion was that an uncompensated carbon price and the winding-up of current electricity contracts would see most most of the domestic smelting industry closed and production moved, in the medium term, to more efficient and less carbon-intensive production offshore. Kurri Kurri, in particular, would become a very high-cost producer. That is, doing what a carbon price is supposed to.
But the institute’s modelling (based however on the CPRS and a lower dollar) suggested that with 94.5% free permits (the same level it will get under the carbon pricing package), Kurri Kurri’s overall competitive position wouldn’t change significantly — it would simply remain poor and worsen slightly.
Kurri Kurri’s particular problems are partly shared with the rest of the industry worldwide or the domestic industry, and partly particular to NSW. This is what has happened to the world aluminium price since the GFC (in US dollars, from the London Metal Exchange):
That is, the rally in aluminium prices after the financial crisis hasn’t been sustained. In February, the world aluminium stockpile was about 5 million tonnes. And, like other smelters in Australia, Norsk Hydro has to deal with the impact of a high dollar on top of the fall in world prices.
Norsk Hydro’s second problem is electricity prices — electricity is nearly 30% of smelting costs, and smelters in Australia normally have electricity contracts linked to aluminium prices. Norsk Hydro’s current contract ends in five years and the NSW Labor government nixed a new contract with Delta Energy in order to maximise its privatisation value in 2010. The company claims this forestalled new investment plans.
The third problem is that Kurri Kurri is old, small and inefficient. It was built in 1967 and has a capacity of 180,000 tonnes a year, although it shut down a third of its capacity in February. Compare that to the vast Qatalum facility, a joint venture between Norsk Hydro and Qatar Petroleum, which is natural gas-powered and will have an initial capacity of 585,000 tonnes. Its total emissions intensity is estimated to be less than half that of Kurri Kurri.
Only a major capital investment would reduce the costs and emissions of an older plant such as Kurri Kurri and given the current state of financial markets, the growing reluctance of governments to subsidise electricity costs and the immediate prospects for the aluminium price when you’re working with Australian dollars, the commercial case for such investment isn’t strong.
That’s why the carbon price is at best a marginal consideration for the future of our older smelters such as Kurri Kurri (something The Australian ignored with its disingenuous “Smelter closure turns up heat on carbon tax” headline). The smelter is unviable regardless of the carbon price; the issue here isn’t carbon pricing but industry policy: the AWU wants to see more investment assistance for the industry to enable it to compete once industry conditions globally return to something like normal.
But the argument again demonstrates how bad we are at taking a rational view of structural change within the economy, whether it’s change we’ve elected to undertake ourselves, or change imposed on us by the Chinese Communist Party. An effective carbon price, like any effective economic reform, is intended to cause job losses in some industries, and generate jobs in others. That’s the best demonstration of the magic pudding nature of the Coalition’s “direct action” plan, rather than its made-up-as-they-went-along costings — the Coalition wants us to believe we can significantly decarbonise the economy with no one being displaced from a job anywhere, with the whole climate change problem magically buried in dirt out on our farms.
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