For the second time in five months Australia’s resources exports have been dealt a crippling blow with the news that Alcoa has declared force majeure on output from its huge Western Australian alumina operations because of the Varanus Island gas facility fire on June 3.

The accident could see hundreds of millions of dollars in mineral exports lost, especially gold, nickel, alumina and some oil products, and perhaps even iron ore, over the next couple of months.

The news will boost aluminium prices around the world because Alcoa’s WA mines produce 13% of the globe’s alumina needs each year: alumina is the feedstock for aluminium.

It will be yet another inflationary problem for businesses to handle on top of soaring oil and fuel prices, high food costs and rising price pressures generally in economies here and around the world.

Meanwhile the cost of diesel fuel is soaring as world oil prices grow and demand skyrockets from motorists looking to switch from petrol to the more efficient fuel, China holds back exports to power thousands of generators sent to the earthquake zone in Sichuan, and now WA miners and other companies look for emergency supplies to keep their businesses running.

The accident has cut the supply of around a third of WA’s gas and led a host of companies to report problems and delays, but Alcoa’s is the most important so far as its alumina business is one of the major mineral export operations in the country. (The Varanus Island gas facility is around 100 kilometres off the NW WA coast and the facility is operated by Apache Energy, a US oil and gas group).

In a statement listed on Alcoa websites this morning after being released in the US, the company said:

As a result of an explosion at Apache Energy’s Varanus Island facility, and the disruption of gas supply to its Western Australia facilities, Alcoa of Australia today notified its customers that it was declaring force majeure under its alumina supply contracts. The extent of impacts upon its customers is yet to be determined. Alcoa of Australia is part of Alcoa World Alumina and Chemicals (AWAC) which is 60-percent owned by Alcoa Inc. (NYSE:AA), and 40-percent owned by Alumina Limited.

The incident resulted in complete shutdown of Apache’s gas production operations at Varanus Island and a declaration of force majeure by Apache to all customers. Alcoa of Australia is still receiving gas from its other supplier – North West Shelf Gas. Given the supply disruption, the full extent to which alumina production will be affected is uncertain, but Alcoa is making efforts to minimize the impact on production and its customers.

In a separate statement to the ASX toward, Alumina Ltd, 40% owned by Alcoa (and whose major investments include the WA alumina plants) said:

The financial impact to Alumina Limited’s underlying earnings for June 2008 from the shutdown of the Varanus Island gas supplies is estimated to be approximately A$12-17 million (after tax). A further update will be provided at the time of Alcoa Inc reporting its second quarter 2008 results on 8 July 2008.

Two miners, nickel group, Minara Resources and gold miner, Newcrest both warned yesterday that output from their WA mines would be cut because of the gas outage with early estimates putting the losses for both companies at more than $100 million, depending on world prices.

Babcock and Brown Power, already troubled by funding issues and a low share price, yesterday warned that its earnings would be hurt by the gas outage. It distributes gas in WA using the old Alinta assets it bought last year. It is due to update the market later today. Its parent’s share price, Babcock and Brown, fell 7% yesterday on the news and the problems resurfacing in US and British banks.

And, local partners in the stricken gas project, Tap Oil and Santos will face earnings hits with brokers already downgrading their forecasts this morning.

It’s the second time this year that exports have been hit by an act of god or accident. The heavy rains and flooding in Central Queensland earlier this year in January and February hit coking and thermal coal exports hard and they are only now returning to normal. The huge mines of the BHP-Mitsubishi Alliance in the Bowen basin were the hardest hit and they are only now returning to normal production levels.

Alcoa says on its Australian website that it operates the Huntly and Willowdale bauxite mines in the Darling Ranges south of Perth, supplying bauxite to Alcoa’s alumina refineries at Kwinana, Pinjarra and Wagerup which extract alumina from it. “The Huntly Mine is the world’s biggest bauxite mine.”

Alcoa also operates two aluminium smelters at at Point Henry and Portland in Victoria.

“These operations produced 31 million tonnes of bauxite, 8.48 million tonnes of alumina and 530,368 tonnes of aluminium in 2006. This represents around 47% of Australia’s alumina production and 30% of aluminium production.

“Alumina production also accounts for 13% of total world demand,” the company said.

The news will put downward pressure on the value of the Australian dollar as well because Alcoa’s alumina shipments are a major overseas shipment.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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