Smelter closure good for Australia

When Alcoa's Point Henry workers met the Prime Minister Julia Gillard on Monday they should have advised her to call the aluminium company's bluff and dismiss its blatant rent seeking tactics.

Just over 12 months ago, the company's majority owner, Alcoa Inc of the US, declared the Australian operations were the jewel in the crown of all its regional plants.

In its annual review of global activities, Alcoa Inc wrote: "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."

A little over a year later, it beggars belief that one of Alcoa's plants is in financial distress and likely to close down, leaving 600 employees jobless.

Given that only one the "challenges" listed above has changed drastically – and that is that Alcoa now has certainty that it will be cushioned from the worst of the carbon tax – serious questions of rent seeking must be posed by the Federal Government.

Further, Opposition leader Tony Abbott needs to, in his own words, "move on" from blaming the proposed carbon price for every manufacturer's decision to cut Australian jobs.

Bewilderingly, his climate change spokesman Greg Hunt repeated criticism of the carbon price again on Monday even though Alcoa has publicly and consistently distanced the review of its Geelong operations from the imminent carbon tax.

Head of Alcoa in Australia Alan Cransberg is on the record, thus: "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.''

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

Alcoa's citing of the rising cost of input materials sounds disingenuous when it is considered that one of those inputs, electricity, is being supplied to the Point Henry smelter for next to nicks.

The smelter gobbles up nearly a quarter of the state's energy at a price heavily subsidised by all Victorians.

For electricity, it uses the Anglesea coal mine and power station, which Alcoa operates, and for another of the input materials, bauxite, it can access that from one of its own mines in Western Australia.

One admission you will not hear Alcoa cite is that it has allowed a 30-year-old plant that has benefitted from more than $4 billion worth of taxpayer funded energy subsidies to become rundown.

The smelter may be out of date and inefficient, but that is 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.

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, (January) Alcoa Inc declared 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 aluminum demand and a global aluminum 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.

But how much profit is enough for the parent company? In 2011 Alcoa Inc said the Australian operation was "in excellent shape, maintaining its place as one of the most profitable Alcoa regions".

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.

Alcoa Inc said back then: "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 aluminum 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 and if the Australian facilities were an outperformer, what does this spell for the corporation's other facilities and how is it that Alcoa Inc is still making money hand over fist?

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?

There are just too many discrepancies for Alcoa to justify.

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 (January), 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 euros by 2030.

Is it possible for Mr Abbott and Mr Hunt to see the irony in the GDA report's headline: "CO2 regulation to trigger growth in aluminium"?

Is it impossible for Ms Gillard to squash unjustified rent-seeking and call Alcoa's bluff?

Let's hope all politicians dig a little deeper for the truth before giving in again to multinational corporations crying poor.