TiP

This week’s announcement of the impending closure of the aluminium operations at the little Hunter Valley town of Kurri Kurri can come as no surprise to close observers of the resources and energy scene.

It has been in the wind for a while.

Nor is it particularly surprising to see and hear the running commentary from media pundits, unionists, politicians of differing persuasions and apologists for the current “clean energy future” policies.

It is, however, a bid sad/depressing/irritating (take your pick) that, after almost four years of debate in this space, it is obvious from the published and broadcast comments that the aluminium situation is still poorly understood.

Perhaps the most important thing needing to be said today is that, as a result of various developments local and international, including a comprehensive mess-up of the electricity price negotiations by the previous Keneally government, not only is New South Wales losing the existing Norsk Hydro operation, shedding 344 jobs, but this also seems to signal that the rather-ailing State economy can kiss goodbye to a proposed $4 billion project that was being evaluated by the company for Kurri Kurri.

Also gone by the board is $500 million worth of upgrading work on the existing smelter.

The new Kurri Kurri smelter would have expanded production from 175,000 tonnes a year, small by world standards, to around 600,000 tonnes, creating 3,000 long-term jobs and about 15,000 construction positions.

To quote Norsk Hydro, when it first mooted this new development, the project would have created substantial and ongoing economic stimulus for the Hunter Valley, the State and throughout the aluminium value chain in Australia.

The fact is that better deals are now available to aluminium companies for new developments in Africa, the Middle East and Iceland (hydro) than in Australia – just as 30-plus years ago we offered better deals than Japan, where the soaring oil prices had undermined its attraction.

The local carbon price, labor costs, construction costs, currency value and steadily-rising power bills are all factors in the mix.

The second important issue is whether the smelters at Bell Bay in Tasmania and Point Henry in Victoria, both also aged contenders in the cut-throat global aluminium trade, will survive the present economic environment.

In the medium-term the odds are that they will not.

Alcoa is due to release its findings from a review of Point Henry at Geelong (employing 600 people directly) at the end of June.

All of which leaves the present federal government and its union backers wedged between ranting at “big polluters” and promising abatement targets on the one hand and desperately seeking to avoid the odium of job losses in a fevered political environment on the other.

As the Newcastle Herald newspaper has pointed out this week, it isn’t only the direct employees at Kurri Kurri who will suffer from the closure – there is a whole chain of people earning a living because it is there, including 150 contractors.

Inevitably, the Norsk Hydro decision is being tied in to the impending carbon tax.

The company itself says this: “The profitability of the plant has suffered as a result of weak macro-economic conditions, with low metal prices and an uncertain market outlook, as well as the strong Australian dollar. It is clear the plant will not be profitable in the short term with current market prices, while long-term viability will be negatively affected by a number of factors, including increasing energy costs and the carbon tax.”

This, at least in part, gives the lie to Industry & Climate Change Minister Greg Combet, whose electorate is home to the plant and who issued a statement claiming the announcement “has been driven by current financial losses unrelated to the carbon price.”

Combet also couldn’t bring himself to acknowledge the role of the past State Labor government is this saga, choosing to say “the key uncertainty facing the company has been reaching agreement with the NSW government over a long-term electricity supply contract.”

This sort of spin doctoring belongs in the same (round) basket as the claim by the Australian Workers Union that the O’Farrell government is “running the smelter out of business by charging sky-high power prices.”

As the party the union supports presided over three of the past four years of NSW price rises and as the major influence on them has been the network charges set by the independent Australian Energy Regulator plus the federal government’s green scheme costs, this is the sort of chicanery that should be exposed by the media not cheerfully reported without balancing comment.

This line continues to run today with reported federal government “anger” at the Coalition failure in NSW to resolve the contract issue – which rather overlooks the fact that it takes two to tango and clearly Norsk Hydro’s interest in making a commitment have waned since the day the Keaneally government called back electricity industry negotiators from their car ride to sign the papers.

Many in the media have been quick enough to leap on Tony Abbott’s claim that the plant is one of the “first victims of the carbon tax” as a drawing of the long political bow (which it is), so why are Labor and its footsoldiers being allowed this licence?

Among the central issues affecting the viability of the more than 30-year-old Kurri Kurri set-up is the amount of electricity it uses to make a tonne of aluminium, 22 per cent more than Norsk Hydro’s new operation in Qatar.

With electricity accounting for about 30 per cent of cash operating costs of a smelter, this is important.

If the new Kurri Kurri development had gone ahead, similar levels of energy efficiency would have been delivered here.

Let’s not lose sight of the fact that, with all that has gone on, we (Australia) have managed to let slip a modern investment that would have contributed to the balance of trade and national wealth.

Inevitably, of course, we are hearing “big polluter” trash talk from some quarters.

It is worth noting that the emissions intensity of the greenhouse gases directly produced by the existing Kurri Kurri plant have been reduced by 75 per cent from 1990 levels and its electricity intensity (the number of megawatt hours needed to produce a tonne of product) has been cut by 92 per cent.

Recently, each tonne of aluminium from Kurri Kurri has also seen production of 2.4 tonnes of carbon dioxide from direct emissions and 14.4 tonnes from the coal-burning power stations supplying its power.

With 85 per cent of their emissions in coal country coming from power stations, smelters on the east coast have no control over the vast bulk of greenhouse gases attributed to their activities.

To put things in context, Kurri Kurri has accounted for about three per cent of NSW electricity demand.

(Pulling this out of the mix, of course, will impact on consideration of new baseload power for the State, a requirement already extended from 2013, as indicated by the Owen inquiry, to around 2018.)

Looking at submissions Norsk Hydro has made to parliamentary committees and the federal government during the life of the Rudd/Gillard regime, several other points stand out.

The first is that primary aluminium production is 100 per cent trade exposed. The Australian companies have no ability to recover locally-imposed costs increases (eg the carbon tax and the RET) through product pricing.

As Norsk Hydro says, in the absence of a global carbon scheme, imposing a substantial cost here risks local economic damage without commensurate international abatement.

Ironically, despite the badmouthing the industry gets, aluminium has a substantial role to play in a lower-carbon global economy because of its light weight. Demand for the metal is growing with the worldwide pressure to reduce emissions.

Imposing heavy carbon burdens (which go beyond the carbon tax) on the remaining, much more modern operations in Australia to drive them away from our shores would not be sensible, not least because this country has some natural competitive advantages to offer, including a strong resource base, fairly good transport and energy infrastructure and proximity to the Asia Pacific market, enabling the full value chain to be established here.

As well, there is always chatter by some about power subsidies for smelters.

Unusually among energy-intensive, trade-exposed businesses, they rely exclusively on baseload electricity rather than at least some proportion of peaking and intermediate power.

Their contracts reflect this because they are generators’ lowest-cost customers.

Of course, State governments have also worked to tilt overall conditions to attract such prized developments.

It is claimed, for example, that support for the Victorian aluminium smelters, one of them Pt Henry, has served to add $2.45 per megawatt hour to all State consumption over the past three decades.

The debate rolls on about how and whether a community benefits from this. It is far from a black-and-white issue.

Conversely, to give in today to union demands to throw more public money at a smelter now closing, and two considering shutting down, for good business reasons is just daft.

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