Last week the business section of newspapers was filled with commentary on the sacking of Rio Tinto’s chief executive Tom Albanese, due largely to the poor performance of Rio’s aluminium business. What was missed is that the illusory lustre of aluminium has not just brought Albanese down, but has also blinded governments on addressing climate change.
Albanese was ranked No.4 on Clive Hamilton’s 2009 list of the dirty dozen lobbyists and policymakers that have undermined emission reduction efforts in the Rudd-Gillard Labor government. But really the prize shouldn’t go to Albanese, so much as Rio Tinto and the Australian aluminium industry more generally.
At the same time his downfall should serve as a wake-up call that aluminium smelting is not a prize anyone should lust over.
Of all the trade-exposed industries in Australia, as the chart below from the Grattan Institute illustrates, aluminium smelting sits top of the pops as the most carbon intensive of them all, due to its huge thirst for electricity.
Source: Grattan Institute.
Aluminium is a ruthlessly competitive industry globally, where the price of electricity is central to profitability and survival. The Australian aluminium smelting sector, dominated by Rio Tinto and Alcoa, realised in the 1990s before most other industries that efforts to reduce carbon emissions were a key threat to their profits.
Indeed, in Clive Hamilton’s original 2006 dirty dozen listing of lobbyists influencing the Howard government, Ron Knapp, head of the Australian aluminium association, was a prominent member.
Back in 2004 the Howard government elected to reject a recommendation to increase the Renewable Energy Target from its own hand-picked review team. In discussions with government officials close to policy deliberations it was made plainly clear what was behind it – concerns about the aluminium industry.
Yet aluminium is hardly a prize worth fighting for, as Rio Tinto has come to realise. Merrill Lynch and CitiBank analysts have estimated that 30 to 50 per cent of global aluminium smelting capacity operates at a loss. Alumina refineries are also facing profit squeezes. Five million tonnes of excess aluminium is stockpiled in metal exchange warehouses around the world.
In Australia, the Kurri Kurri smelter has shut and the Point Henry and Bell Bay smelters would probably also be closed were it not for government subsidies. In addition the Gove alumina refinery is likely to be put into mothballs soon due to its reliance on expensive fuel oil.
But in spite of its poor profitability and huge excess supply, the industry seems to obstinately refuse to close capacity. The reason is because aluminium seems to wield some kind of strange magic that leads politicians and bureaucrats that staff industry and energy departments to lose any sense of rationality.
This goes not just for Australia but countries around the world, even though it is not a big employer by any relevant yardstick.
Rio Tinto made a massive bet in 2007, when it acquired Alcan, that economics would prevail over the global aluminium industry, rather than government irrationality. They were wrong.
China has continued to add further production capacity even though excess supply and its own poor resource endowment suggests this makes little sense. And other countries have resisted the closure of their own existing facilities.
Many Australian politicians and policymakers have fallen for the misguided belief that cheap energy is a key source of competitive advantage and source of prosperity for Australia. On the front page of The Australian Financial Review today there are industries calling for subsidised energy. Yet the industries for which cheap energy is important are small employers and face ruinous excess supply globally.
Also a successful manufacturing sector is not necessarily built on cheap energy. Japan, Germany, Northern Italy and Korea have built some of the best manufacturing businesses in the world, yet pay some of the highest energy prices in the world.
Rio Tinto has learnt its lesson. Will Australian politicians?