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May 24, 2012

Aluminium, industry policy and losing our way on reform

The closure of the Kurri Kurri smelter lifts the lid not merely on a troubled industry but a troubled policy process.

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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.

It also wants us to believe this is a bad time to be imposing a major reform such as a carbon price. Unemployment, interest rates and inflation are all at low levels, lower than for most of the past 30 years. This in fact is the best time possible to be undertaking reform, because the economy has more easily handled the transition by providing jobs elsewhere for displaced workers.

That’s why the AWU is wrong to call for a major assistance package for aluminium. But it also points to another problem. The policy making class in the country — particularly politicians but also economists and commentators (like me) who prognosticate about structural change despite not being threatened by it themselves — have lost the ability or the will to explain to people in the front line of economic change, like the workers at Kurri Kurri, exactly what is going on and what our long-term goals are.

Why aren’t we assisting these industries now when we have before? What support are workers entitled to expect from governments when they find themselves in an industry under the hammer from a high dollar or global headwinds? Why do we elect to support some industries and not others? How are we pursuing fairness in all this? Instead, our politicians prefer to throw cash at voters and declare them “compensated”.

It’s a bit much to complain about Australians’ sense of entitlement and reluctance to acknowledge how good the economy is when policymakers are so inept at explaining to them exactly what we are trying to do with the Australian economy.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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21 comments

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21 thoughts on “Aluminium, industry policy and losing our way on reform

  1. Thorn

    Abbott’s immediate claim that the proposed Carbon Tax was to blame for the smelters closure is just another of the thousands of unsubstaniated claims he makes, and that are never ever seriously challenged by the media. His statements are treated like a joke, even by you Bernard who dismisses them, but as an aside rather than a serious failure to understand the issue. His Axis of Ignorance collegues in Robb and Hockey know that he is talking rubbish, but it is not up to them to get Abbott to tell the truth, even though they must be secretly terrified of what will happen if Abbott is ever let near the centre of power – I know I am.

    The problem is the lack of effective communication by the Government, as this allows fear and loathing to be whipped up by the Liberal Party and it’s propaganda arm in the anti Government media.

    The lack of understanding out here for the whole point of a carbon tax is staggering, even from people that support the idea of reducing emmissions. At dinner the other night there was a lady that declared she was for a carbon tax but was against carbon permits. She did not understand that some industries will have a very hard time reducing emmissions, so they will be able to purshase carbon permits to reduce the tax they pay – and that those permits will come from people that have the ability to reduce emmissions, thus creating a saleable asset in their carbon credits and jobs and investment in green industries.

    I do not think that the Government has even tried to explain how the thing will work, and have left the field open for Abbott to plant as many untruths as he is capable of – and that is an awful lot as we have seen on a whole range of topics. He has never been held to account for his own crazy plan to reduce emmissions, even though he has the same reduction goal as the Government – it is hard to dismiss the idea that the media is actually assisting him with these delusional policies or they would hold him to the same level of disclosure and openness. Is it really in the Countries interest to let him sneak into the Lodge without declaing his policies, and having them costed by Treasury. He had them done by that firm that the Liberal party was paying and that firm seemed to miss the billions of dollars of shortfall that Treasury found.

    This ridiculus lack of questioning of Abbott’s intentions has to stop, for the Countries sake. Although a lot of what Thompson said might be questioned – he hit the nail right on the head when he declared that Abbott was a threat to the future of Australia.

  2. Frank Campbell

    “ the Coalition wants us to believe we can significantly decarbonise the economy…”

    I doubt many in the Coalition actually believe any such thing. Their policies are an overhang from the heyday of climate hysteria- when they had no political choice but to fall into line. But there were two lines: the aptly named Turnbull who was deftly corralled by Rudd into an ETS, and the Minchin-Abbott Right which awoke just in time to realise the Libs were being domesticated for a generation by Labour and its allies. That awakening was the beginning of the end for Rudd, though Crikey and the Left thought the opposite for many months…embarrassing themselves by trumpeting the apotheosis of the Greens, splitting of the Coalition etc…

    Keane certainly believes “decarbonising” is possible, and that the carbon tax is the right method. Of course the Opposition exaggerates the negative effects of the carbon tax. There will be some, but who seriously imagines that $23 a tonne will affect the current fossil fuel bonanza- a bonanza sponsored by both major parties?
    The scheme itself is absurd- a huge churn of cash which guarantees nothing much will change. “Polluters” are rewarded, losers are “compensated” and billions are to be thrown at unready, expensive, unreliable “renewables”. Not a single fossil fuel power station has ever been made redundant by “renewables” like wind and solar.

    It’s as mad as Craig Thomson.

    As usual, Keane and other defenders of this Pythonesque absurdity are reduced to bewailing the failure of…marketing! If only we could only “communicate” the transparent virtues of the carbon tax to a confused and misled public….

    Face reality, Keane: the public know the scheme is ridiculous. Some were fooled all of the time, all were fooled some of the time- but no one will be fooled forever.

    Never once did Crikey or the Left admit there was a Green/Left critique of climate extremism and its hideously deformed offspring, the carbon tax.

    But they’re going to have to rethink the entire strategy- or concede the future to the simian Jesuit.

  3. linda domaschenz

    I’ll have to admit that I’ve become a speed reader the last couple of years. The bile being spewed by the MSM is unbelievable.
    I can never remember a time in my 54 yrs of an interest in politics that we have become so pathetic, bitchy and destructive!
    I want a better political discourse.

    Back to aluminum smelters and the carbon price. Why on earth these industries where ever encouraged is debatable. No doubt the collaborative push by mining,unions and govt to secure jobs was justifiable at the time. But in hindsight what a retrograde move. It’s obvious as a household shopper the push by the industry to invade our lives with useless bits of foil on nearly everything you purchase. A little bit here, a bigger bit there, an even bigger bit on another product. Do we need this crap? NO
    Do we need a carbon price? Yes
    The aluminum smelting business could be reduced to sustainable production and not face the impost of the carbon price as predicted if it reduced the unnecessary rubbish it produces. I don’t need a foil seal on my toothpaste or jar of moisturizer thanks. The new phenomenon is unnecessary and not welcome. Sure you can recycle your drink can, but all this other senseless packaging goes into landfill and of course adds to the cost of the product?
    How dumbed down can we get?
    I don’t need my toothpaste placed in a box as well.
    I welcome the carbon price and a shift in consumer consciousness.
    If the carbon price is to work, these unwanted and unnecessary packaging industries will/should join the dinosaurs.
    Employment needs to be created in innovative & productive manufacturing preparing ourselves for our cleaner future.Bring it on.
    As for the media, don’t get me started!

  4. Owen Gary

    We are often told about our mining & gas boom, yet everyone who is not working in the mining sector (the majority) is suffering, this is because all profits are leaving the country faster than rats leaving a sinking ship. The Barnett government has put up all utilities 70% in the last 3 years without any carbon tax. Public housing is critically low with more & more people each year (including their families) having to sleep in their cars for refuge.

    What did Barnett do:- He puts 100 million towards public housing (peanuts) he spends half a billion on a museum & 1 billion for a surplus. This guy & his party should be hung, & all his properties taken off him for the homeless.

    PS: Our gas is being sent to China for just over 5 cents a litre whilst we pay a ransom at the pump. Even the Saudi’s let their public have the benefit of cheaper fuel.

    As far as the Aluminium industry is concerned, it takes an obscene amount of electricity to smelt Bauxite into Aluminium, do you think these companies have been paying their power bills? We the public have been footing the bill for these industries since their inception so let some other country manufacture it & their citizens pay the price, this shit is so toxic to the human body anyhow.

    So knowing all these things what makes you think our Governments control anything, they are there to control “US” while faceless international cartels pull their strings.

    Wake up people, the word ECONOMY is a ruse, the whole system has been set-up like a one huge “PONZY SCHEME” the two party political system is the same one that exists in every so called developed nation.

    It’s up to you do you take the “Red or the Blue” pill. As for the political facade, thats just another distraction!!

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