Alcoa: seeing through the carbon tax doomsday predictions

 

 

Mr Abbott invoked this ill-informed view again on Wednesday when Alcoa suggested it may have to shut down its aluminium smelter at Point Henry in Geelong, which employs 600 people, because it was uneconomic.

 

 

Yet Alcoa itself distanced the review of its Geelong operations from the imminent carbon tax because it understands that the Federal Government is exempting the company from the harshest pain of the tax.

 

 

Alan Cransberg, head of Alcoa Australia said in this week's press release:

 

 

It was 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.

 

 

Alcoa could have elaborated by explaining that in many countries where there already is a price on carbon that aluminium sectors are thriving.

 

 

Germany, for instance, is building smelters not axing them because the nation's industrialists understand that demand for aluminium is set to grow and grow, especially as limits on carbon emissions are tightened further.

 

 

According to the German aluminium industry association, GDA, aluminium is processed in 600 plants in Germany and in 2009 the sector employed 73,000 people directly.

 

 

Now Germany's manufacturers have for years factored into their operating costs a price on carbon - in the form of emissions trading and feed-in-tariffs that require electricity generators to purchase renewable energy.

 

 

As one of the world's biggest reliers on renewable energy and with the most ambitious emissions target among advanced countries (100 per cent reliance on renewable energy by 2050), German industry is hardly staring at bankruptcy.

 

 

It has just recorded its lowest unemployment rate in 20 years, its economy is still growing, it is shouldering the responsibility of bailing out Europe's failing economies and it is snatching Australian defence vehicle contracts out of the hands of local manufacturers in Bendigo, to boot.

 

 

Deniers such as Mr Abbott who mislead with their doomsday predictions about the carbon tax can never justify their opinions in the face of evidence like this.

 

 

Nor can the major parent company of Alcoa Australia, US-based Alcoa Inc, blame the possible demise of Point Henry entirely on the "high" Australian dollar or the increasing costs of materials.

 

 

Alcoa Australia is 60 per cent owned by Alcoa Inc and 40 per cent owned by Australian listed Alumina Ltd.

 

 

Point Henry gets nearly half of its energy for next to nicks from the Anglesea coal mine and power station it operates, and bauxite, the material which it refines into aluminium, from its own mines in Western Australia.

 

 

What Alcoa Inc doesn't get is that the 30 year old Point Henry smelter is out of date and inefficient because insufficient capital has been invested in it to make it competitive with the rest of the world's newer and state-of-the-art smelters.

 

 

It has allowed an operation that has benefitted from more than $4 billion worth of taxpayer funded energy subsidies to become run down.

 

 

Calls for the Point Henry operations to be propped up even further with more Victorian taxpayer subsidies must not be heeded by Premier Ted Baillieu unless he can extract a commitment from Alcoa Inc that it will spend to make the plant as efficient as its overseas competitors.

 

 

Last month, Alcoa Inc announced a dividend of nearly $1 a share. With 1.06 billion shares on its books, the aluminium giant will be paying out about $US1 billion to its shareholders this year (2012).

 

 

In its latest financial update Alcoa Inc revealed that it had collected revenue of $25 billion from all its global operations for the year, which was 19 per cent more than in 2010, that it had close to $2 billion in cash on hand and that it was forecasting 7 per cent growth in global aluminium demand and a global aluminium supply deficit in this year.

 

 

This is hardly the picture of a struggling corporation, but rather a glimpse into one that unduly rewards shareholders while refusing to invest in operations that are not super-profitable.

 

 

Or are they? Just 12 months ago, the parent company gave this review of its Australian operations:

 

 

Alcoa of Australia ended 2010 in excellent shape, maintaining its place as one of the most profitable Alcoa regions and a critical element in the global Alcoa system. This came despite significant challenges, including uncertainty over carbon price legislation and a resources tax, energy security issues, rising production costs, and currency impacts.

 

 

It went onto explain the impact of a rising Australian dollar and how this did not stop the local operations from continuing to be among the lowest cost asset in the Alcoa Inc portfolio.

 

 

The value of the Australian dollar escalated throughout 2010, hovering in the high nineties and even hitting parity with the U.S. dollar late in the year. With operating costs in Australian dollars and product sold in U.S. dollars, costs of alumina and aluminium production in Australia rose significantly. Despite this, Alcoa of Australia's facilities remained at the low end of the global cost curve at the end of 2010.

 

 

In 12 months, why has this assessment changed?

 

 

The average value of the Australian dollar since this assessment, over the past 14 months, has been $1.03. Just slightly higher than parity.

 

 

How is it possible that an appreciation of around 3 per cent in the currency from the time of the assessment would be enough to make Point Henry sufficiently uneconomic to close down? It beggars belief.

 

 

Now, backtrack to Alcoa Inc's forecast of a 7 per cent surge in demand for aluminium in 2012 and you can see why German companies, among others, are continuing to invest in efficient smelters.

 

 

GDA, the nation's industry association is equally bullish.

 

 

Last month, GDA cited a McKinsey & Co report that forecast that regulations to limit emissions from European cars will force car makers to increase from 30 per cent to 70 per cent the quantity of light weight materials used in auto manufacture.

 

 

The regulations, which begin to tighten from 2015, will require emission-free electric drives and batteries that are heavy. To compensate for the extra weight, cars will increasingly rely on lighter materials such as aluminium for other parts.

 

 

Estimates put the expanded market at €300 billion by 2030.

 

 

Is it possible for Mr Abbott to see the irony in the GDA report's headline: "CO2 regulation to trigger growth in aluminium" … and not the other way around as he bleated this week?