Blaming the value of the Australian dollar for all the problems and ills in manufacturing has become the easy option for companies, the media and politicians. We’re getting another round of this with the Alcoa coverage.

But it’s not just the high value of the Australian dollar, it’s the weak prices and outlook for aluminium, and possibly the impending end (in 2014) of a lucrative power contract, that has seen Alcoa review its 49-year-old Point Henry aluminium smelter in Geelong, Victoria. Alcoa didn’t shy away from listing the problems for the smelter, but failed to mention the power agreement, which might be a sign of its importance.

As Crikey explained last year, Alcoa and other aluminium smelting companies, which account for up to 7% of our total greenhouse emissions, benefit from state government subsidies worth hundreds of millions a year. There’s a cosy union of interests between companies, unions and state governments that have kept the details of these subsidies from ever being properly revealed.

Again some of the Australian media has failed to provide a proper context for a controversial decision in the business arena. Yesterday’s initial report on The Australian’s website was typical — head for the easy political option, rather than do a bit of digging. And the federal opposition, which can’t even work out whether it will have a budget surplus or not, is even more culpable, trying to blame the carbon pricing package even as local Alcoa MD Alan Cransberg denied it.

The Australian’s report was outright wrong in suggesting that “higher metal prices” were a factor. In fact the Alcoa CEO said in his statement yesterday:

“… it is important to note that the review has not been prompted by a future price on carbon. The present situation is a result of low metal prices, a high Australian dollar, and input costs. The future price on carbon would be an additional cost, however Point Henry smelter is already losing money.”

The weak aluminium market has put downward pressure on alumina prices, which Alcoa said fell 9% in the fourth quarter while its selling price for metal fell 12% in the same period. Alcoa controls its alumina input costs (its second biggest cost after the cost of power) because it controls 60% of Alcoa World Alumina and Chemicals (AWAC) which is one of, if not the largest, alumina producer in the world. The listed company, Alumina Ltd owns the remaining 40%.

Alcoa’s problem is lower metal prices, and a weak outlook resulting from Europe that is having as much impact on this review as the value of the Aussie dollar. But contrary to the impression in media reports, the review isn’t just limited to Australia. It is part of a company-wide restructure by Alcoa to try and lower costs given the weakness of world metal prices. Alcoa has been revealing cuts since announcing its 2011 results in early January.

It has said that it will curtail operations at three facilities in Italy and Spain by the first half of 2012. The decisions are part of a plan to close or curtail approximately 531,000 tonnes, or 12%, of Alcoa’s global smelting capacity, to cut costs and increase the company’s competitive position. Alcoa says the smelters at Portovesme, Italy and La Coruña and Avilés, Spain are “among the highest-cost producers in the Alcoa system,” the company said and account for 240,000 tonnes of capacity . Alcoa has also announced the permanent closure of its in Alcoa, Tennessse, smelter, and two potlines at its Rockdale, Texas, smelter. That’s another 291,000 tonnes of capacity. Alcoa plans to close the Portovesme in Italy facility permanently, while the La Coruna and Aviles in Spain facilities would be closed partially and temporarily. Alcoa reported a loss for the fourth quarter 2011 of $US191 million. The losses were blamed on falling aluminium prices as well as weaker sales.

Rio Tinto is tipped to take a $US5 billion charge against its Alcan aluminium business in its 2011 results today, and is closing or spinning off facilities in Australia, NZ and other countries. Again, this has nothing to do with the carbon price. Rio Tinto bought Alcan for $US39 billion in 2007, at the top of the market, a deal that almost sent the company broke and into the hands of the Chinese government.

Global aluminium prices fell 27% from their peak last April to the end of the year, including a 12% drop in the third quarter alone. But despite the fourth-quarter loss, Alcoa has a very profitable 2011. It earned a net profit of $US611 million and revenue of $US25 billion for 2011. This compares to $US254 million in net income and $US21 billion in revenue for 2010. The group is optimistic about 2012 and beyond, saying in its first quarter report:

“For 2012, we expect global aluminum demand to grow 7 percent and are forecasting a global deficit in primary aluminum supply. In fact the company forecasts a doubling in global aluminum demand between 2010 and 2020.”

As we’ve seen with the car industry, manufacturing is increasingly becoming a heavily politicised debate, in which everyone — companies, unions, governments, oppositions and the media — all bring a determination to fit the facts into whatever narrative they want to push.

And when that happens, it’s taxpayers who end up coughing up as often as not.

Peter Fray

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