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Jul 2, 2014

Age of entitlement lingers in one industry

The Australian aluminium smelting industry is dying, and the reasons have nothing to do with the Renewable Energy Target.

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A manufacturing industry owned by foreign multinationals, employing only a small number of heavily unionised workers, in receipt of generous government subsidies justified because the industry is considered “important”: how will it fare now that the age of entitlement is over?

Based on the experience of the car industry, you would expect Treasurer Joe Hockey to be slashing its subsidies and chasing it out of the country, to the cheers of his backbench delighted the era of mollycoddling is over.

Not so the aluminium industry: a group of 25 Coalition backbenchers led by Dan Tehan is calling for subsidies for the smelting sector, via a full exemption — rather than the current partial exemption — from the Renewable Energy Target.

Smelting is one of Australia’s most heavily subsidised industries, and one of its least efficient: it is closing despite decades of generous government handouts. The reason it’s not seen in the same light as the automotive sector is that subsidies primarily come from state governments rather than the federal government.

Until recently, smelting consumed around 15% of all electricity in Australia, all of it, apart from Tasmania’s Bell Bay, coal-fired power. By itself, smelting accounted for over 6% of our greenhouse emissions. It also enjoyed subsidies of, it is estimated, at least $400 million a year in current dollars, and probably much higher, either via long-term subsidised electricity contracts with state governments that linked electricity cost to the global aluminium price or, in Queensland, the subsidised sale of electricity generation assets. These subsidies were strongly supported — automotive industry style — by the Australian Workers’ Union, which even commissioned some “independent modelling” to argue smelting should be exempted from a carbon price. The subsidies were put in place — in some cases many decades ago — by state governments keen to create big regional manufacturing job centres, in an age when cheap coal-fired power was seen as a marvellous windfall for eastern Australia.

For all those handouts, we got several billion dollars a year in aluminium exports, but comparatively few jobs — 5,000 across the six smelters operating in 2011. And despite the subsidies, since then Norsk Hydro has closed its Kurri Kurri smelter in NSW and Alcoa announced early this year it was shutting its Geelong smelter next month.

The reasons are simple: Australia’s smelters are old, and grossly inefficient compared to foreign competitors; to be viable even with hundreds of millions of dollars a year in subsidies, they need massive investment. That brings us to the other problem: the world aluminium price, despite a small recovery this year, has been declining for years due to a glut of production capacity, much of it in new, far more efficient (and far less emissions intensive) smelters in countries like Qatar. Alcoa has been reducing its smelting capacity worldwide since 2012. No one is lining up to given Australia’s remaining smelters the investment they need.

The result: despite decades of handouts, the Australian aluminium smelting sector is dying, and for reasons unrelated to a carbon price, or to the Renewable Energy Target, or even the Australian dollar — although the latter isn’t helping. It is an old, under-capitalised industry facing competition from newer, better rivals in a market saturated with capacity. Propping it up, as Tehan and his colleagues want to do, only prolongs the inevitable.

Still, it’s funny how the age of entitlement lingers on in the minds of some within the government.

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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