AFR: Greenies killed Alcoa

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The AFR’s Ben Potter has an awful take on the departure of Alcoa today:

Maybe now gas crunch deniers like the NSW Greens and the conservative governments of NSW and Victoria will get the message: Costly energy drives out industry, manufacturing, and high paying jobs.

In the scheme of things Point Henry didn’t stand a chance. A 50-year-old mill, with none of the automated smarts that are keeping the larger smelter at Portland in western Victoria viable for now, it was a rabbit in a spotlight.

…This is not a case where workers’ conditions were the principal culprit, although at $80,000 they were well remunerated. But the biggest single cost in aluminium production — otherwise known as “congealed electricity” — is energy.

…Australia has for years had a high cost energy strategy — leading the world in renewable energy targets and carbon pricing, prioritising liquefied natural gas exports over the domestic market, and turning against onshore gas production in two of the largest states all at once.

…The denialists include not just the usual suspects like the Greens, but conservative governments in NSW and Victoria who’ve been intimidated by a successful campaign of misinformation mounted by anti-gas campaigners. With friends like these, industry might wonder if it needs enemies.

Sadly, Potter is long on flammable gas but short on details. I’m not sure how much gas versus other energy sources that Alcoa used (perhaps a reader can clarify). But exactly how would more domestically produced gas help the price when the real problem is that it’s all being siphoned off to North Asia? The problem is a lack of any domestic gas strategy, not one of supply shortages brought about by communities that have legitimate concerns around environmental contamination. More gas would just mean more shipped LNG unless you force some gas to stay at home.

The mad dash for LNG that took hold of successive governments and the gas industry without any consideration of the consequences is the clear culprit, ably supported by a cheer squad of official economists endorsing structural adjustment to higher commodity exports.

Comments

  1. Somewhat off topic (maybe not), I just found an excellent survey on basically how stressed Australians are and what are the causes:

    24% of Australians reported experiencing stress. of those, 52% reported financial stress as leading cause. 18-45 years ranked financial stress as the main stressor, 46-55 ranked it 2nd, and 56-65 as 3rd.

    lots of interesting information in this survey, it’s released yearly, here’s the link:

    http://www.psychology.org.au/Assets/Files/Stress%20and%20wellbeing%20in%20Australia%20survey%202013.pdf

    • 52% reported financial stress as leading cause.

      I had the radio on in the office yesterday and happened to hear a guy winning $100 in a call-in competition say these words

      “This will come is so handy mate as I am up to my eyeballs in debt”…..

      Hmmm! Just how far can you stretch $100 these days.

      End game cannot be too far off.

      • If I was him I’d go buy a couple of slabs and go home!

        I’d get a 99.9975% LVR and buy a house in Sydney.

      • Hmmm! Just how far can you stretch $100 these days.
        For some, $100 represents an average Friday drinks/dinner.

        For others, it doubles their disposable income for the week.

        I propose that more people ringing up radio stations fall towards the latter of those two scenarios than the former.

      • I feel the AFR has gone down hill since Stutchbury became editor. His dogmatism is best placed at his former paper The Australian. In addition I have noticed a serious drop off in subediting at the AFR. Tenses wrong, words misspelt, words missing, and so on. That aspect of it is nothing short of embarrassing.

  2. No one has explained why we should subsidise energy intensive Australian manufacturers with cheap gas via a gas reservation policy, instead of the more efficient option: export gas and import cheaper goods from North Asian economies with the added bonus of a high AUD?

    Or is this all about jobs and not productivity?

      • Got to have jobs to pay for all those imports. Where are they coming from?

        The gas export would pay for the imports. Jobs are easy to create. Give one person a job of moving rocks across the road, then give another person the job of moving the rocks back. Why on earth would you desire more pointless work?

      • Nice graph but given about 1.5m white collar jobs are expected to be outsourced to Asia in the next 10 years, many of the growth areas will be decimated. As Claw pointed out, guess we can all be employed to wipe boomer asses then head out for a coffee in our wonderous service based economy.

      • Capitalist and where does the income come from to support the services economy? Economic growth does not occur in a vacuum.

        How far can we run a CAD before our foreign creditors ask us to start paying it back?

      • Mav…Jason will do very adequately.

        However Capitalist has a point. If the manufacturing is not sufficiently productive then teh nation is better off just exporting the gas and everyone sitting on their a..e!
        However, trying to assess viable production in this mad house excuse for an economy is nigh on impossible. It might be a good idea to try to keep some of our productive capacity just in case we run out of mines, farmland and food processing to sell.

        The whole prosperous economy = service economy is indeed baloney. Capitalist your chart simply illustrates teh problem…we’re all service sector and that has caused us to be deep in debt and having sold off most of our natural resources BEFORE they even got dug out of the ground.

      • @Wingnut

        The economy is extremely dynamic. While you are correct that there will be more outsourcing in the future, there will also be new technologies and jobs created that we cannot even fathom today.

        @Jason

        Australia will specialise in the industries that it has a comparative advantage in. Industries such as mining, agriculture, energy (massive LNG exports) and on the service side education and tourism.

        Morgan Stanley reckon we might have a current account surplus in a few years.

      • Jason, you sustain consumption by convincing people they’re richer than they are by blowing up asset bubbles and offering people super cheap debt! Worked well in U.S, until it didn’t.

      • @flawse

        I agree the economy has large imbalances and is highly indebted. I think there will be a crash but who knows if it’s in 2 years or 10 years? Just take advantage of current commodity prices and deal with the situation as it unfolds.

        As long as the music is playing, you have to get up and dance.

    • Capitalist, I struggle with the concept of an economy where the main contributor to jobs growth is healthcare and social services. These don’t strike me as particularly productive sectors that can earn Australia a living in the world.

      It seems your view is that we should just let our uncompetitive sectors die off, earn our way in the world through our comparative advantage in resources, and the rest of us go on the dole or provide social services to each other.

      • The reason services become the main job driver is because the economy can fund all of its imported goods with exported goods and therefore domestic labour is increasingly allocated to services that enhance our standard of living further.

        What earns Australia a living is the demand for minerals, energy and agricultural goods that our Asian trading partners cannot produce. Think about Japan, Korea, Taiwan, Singapore etc. all have efficient manufacturing industries but no natural resources.

        If you view the world as one giant economy, Australia mainly provides the commodities and the rest of the world uses those resources to manufacture products which they sell back to us. The system works so long as we can export enough to roughly cover imports. If commodity prices fall dramatically then we are in trouble. But predicting if and when that happens is very difficult.

    • The profits from LNG exports are largely earned by foreign owners of the companies exploiting the resource. That is, they are largely not available to Australian residents to spend.

      We’ll capture some of the rents from offshore LNG through the PRRT. The CSG drilling contractors may eke a living out of supplying onshore gas.

  3. The fact that the plant is 50 years old, obsolete and therefore expensive to maintain and operate might be the main factor for it’s closure.

    The high AUD might be the reason that a new greenfields plant is not being built.

    But a high AUD is a feature of specialisation, globalisation and comparative advantage (in agriculture and mining coal and iron ore)..

    • Perhaps if some of that capital in housing had gone into modernization investment then the plant wouldn’t be so obsolete.

      This is a textbook example of housing crowding out the rest of the economy..

      • hubris_and_hyperbole

        What evidence is their that the predominance of housing finance limited Alcoas ability to finance changes to its plant?

  4. He’s half right. Higher energy costs cost business. Scrapping the carbon tax and RET will go some way toward alleviating cost pressures and by extension, employment pressures. I understand Alcoa received very preferential energy pricing (a necessity for energy intensive manufacturing).

    A domestic gas reservation policy may ensure supply but may not necessarily reduce the cost.

  5. It seems rather dopey to ship tonnes of coal to China where it is burnt to produce aluminium. It would seem smarter to burn it here and ship the much smaller and lighter finished product to China.

    Does it really help the environment if we charge Granny a bit more to keep warm in winter, and yet exempt the shiploads of coal going to China?

    • Alcoa’s electricity costs have been massively subsidised for more than 30 years – it’s not the carbon tax that drove them out.

  6. Come on…

    Alcoa had long term energy (electricity) agreements in place. They were 90% compensated for RET and carbon price costs.

    Chinese aluminium smelting overcapacity has driven Aluminium prices to the point where an old/small smelter like Pt Henry can’t compete.

    As far as electricity demand goes… We saw last year what the closure of Kurri Kurri did to electricity demand in the NSW pool. Should a few more smelters go…. The National Electricity Market is F%^$%ked!

  7. Diogenes the CynicMEMBER

    Port Henry is roughly 2% of NEM demand. They had cheap long term electricity pricing and were protected from most of the carbon tax so 3d1k’s point is baloney. Old plant, high AUD and over supply in the industry are contributing factors. The hollow men shall preside over a hollow economy.

  8. Potter seems to have overlooked the fact the primary energy used by the smelter is overwhelmingly brown coal. Gas is only used for peaking generation, while aluminium smelters practically have a flat load profile. The availability and price of brown coal has nothing whatsoever to do with restrictions on unconventional gas extraction. As others have noted, brown coal generators and trade exposed energy intensive outfits (aka smelters) were given generous cash handouts plus free carbon permits so you can’t blame the carbon price either.

  9. high electricity prices actually helped some Al smelters around the world. Many of them built co-gen power plants and started producing electricity not only for their needs but for general consumption. Some smelters earn more on electricity sales than smelting.

    Did Alcoa ever requested approval for such power plant?

  10. In response to your question. It appears appoximately 40 percent of the energy used at Port Henry came from Alcoa’s own brown coal generator at Angelsea.
    http://www.alcoa.com/australia/en/info_page/anglesea_overview.asp

    As for the rest, Port Henry was/is covered by a long term energy purchase agreement signed with the, then, SECV which expires in 2014. The price was linked to the price of aluminium.

    http://www.alcoa.com/australia/en/info_page/Energy_Victoria.asp

    So to date the price as set in the National Electricity Market was largely irrelevent to Port Henry.

    From the expiry of the agreement the price would most likely have been determined by Alcoa’s ability to negotiate prices with generators under a contract for difference.

    Given Alcoa are closing Port Henry, whatever deals they may have been able to negotiate clearly weren’t attractive enough.