David Honey: Labor’s part in Alcoa closure

State and Federal Labor governments like to promote the need to grow downstream manufacturing of our mineral resources. They are very happy to turn up in fluoro vests and hard hats whenever a new facility is opened. They are not so keen to be seen when they close. All the more so when it is their own policies that have been a major contributor to that closure.

The announcement by Alcoa last week that they are mothballing their Kwinana refinery by the end of the year is a major blow to downstream manufacturing in WA. Alcoa has positioned this as a commercial decision. That is very likely the case. However, it is a commercial decision made within the framework of State Government inaction on timely approval of a new mine plan and the pending carbon tax which will result from Federal Labor’s legislated 43 per cent carbon emission target by 2030.

Manufacturing jobs like the ones at the Kwinana refinery are the types of jobs we’d like our children to have —high-paying, interesting and located in the metropolitan area. Most of the workers at the refinery live a short drive away from their work. Unfortunately, for a good number of the workers losing their positions due to this closure, FIFO will be the alternative they and their families will be forced to endure.

Despite the “nothing to see here” statements by the State and Federal Labor governments, their inactions and actions have been a significant contributor to the closure.

The economics governing refineries makes for dry reading for some. There are a couple of factors that are easy to understand. The first is that refineries have a high fixed cost that doesn’t vary much with production rate. The second is that they only make a profit on the last portion of their production — most of the production simply covers the high fixed costs. Hence, you need to run the refinery at maximum production to generate a profit.

That is why the State Government’s delay in approving Alcoa’s mine plan was such a large negative impact on the business. Alcoa was forced to mine lower grade bauxite ore and reduce supply to Kwinana.

The refinery had initially shut down 20 per cent of its capacity at the plant because of gas shortages and the bauxite shortage extended that reduction, making it impossible for the refinery to generate a profit.

The Federal Labor Government’s legislated 43 per cent emissions reduction target by 2030 and net zero by 2050 are additional burdens reducing the incentive for heavy industry to invest in aging plants. Alumina refineries are large energy consumers and, hence, carbon emitters. The Australian Aluminium Council reports that alumina refineries in Australia emit around 0.7 tonne CO2 equivalent for every tonne of alumina produced. At nameplate capacity, the Kwinana refinery can produce around 2.2 million tonnes of alumina each year.

If businesses cannot offset their carbon emissions, they are compelled to purchase Australian Carbon Credit Units from the Federal Government. In other words, this is simply a carbon tax.

Offsetting such large emissions is not trivial. Neither is it cheap. Achieving a reduction of more than a few per cent by 2030 is effectively impossible. It would cost Alcoa around $60 million to purchase ACCUs for 43 per cent of Kwinana refinery’s carbon emissions in 2030. Given the built in inflation of the ACCUs cost over time, it would cost over $200 million annually to purchase them for a 100 per cent reduction by 2050. The refinery simply cannot afford this massive tax on its operations.

There may be some who will welcome the closure of Alcoa’s Kwinana refinery as a positive move that will reduce carbon emission levels and help the environment. In fact, the environmental outcomes will be much worse.

Alumina and aluminium production are ultimately driven by global demand, not production capacity. Alcoa will not be able to make up the lost production from Kwinana at their remaining two WA refineries any time soon. Hence, that production gap will be filled overseas, most likely, by China.