Toyota today, Alcoa is next

The Abbott government has done the sensible thing letting the car manufacturers fold without handing out hundreds of millions in taxpayers dollars. It would have been like money down the drain because, in the end, the manufacturers don’t see Australia as being strategically important to their operations.

Consequently, even with streams of taxpayers money, Australian plants would never get the access to overseas markets and the capital investment required to achieve world competitive economies of scale. Detroit and Tokyo have decided for a variety of good reasons that Thailand and China will be the priorities for investment – and there’s not much the Australian government can do about it.  

Taxpayer money isn’t much good if the fundamental underlying business case isn’t there over the long term.

Back in May 2012, the Labor government didn’t have the guts to do the same when it came to the Alcoa Point Henry Smelter.

Desperately worried about how then-opposition leader Tony Abbott would seize on the closure as caused by the carbon price – it wouldn’t have been the cause – the Gillard government handed over $40 million of taxpayers' money for the plant to stay open for another two years. By then, it would have calculated that an election would have passed and the hysteria surrounding the carbon trading scheme would have died down.  

That agreement will soon expire in June.

Credit Suisse analysts Matthew Hope, Paul McTaggart and Justin Teo observed in a research note on January 10:

Ultimately a struggling company cannot support a loss-making operation. Alcoa pointed out that 180ktpa of aluminium capacity remains under review in 1H'14, and we fear this means the end is near for the Point Henry smelter in Geelong. The previous government subsidy expires in mid-2014, and the new government is unwilling to engage in corporate welfare. The closure would be positive for AWC shareholders, but clearly negative for the workers and the Victorian community.

Point Henry’s business case has three fundamental flaws which means closure is a positive for shareholders.

First and foremost is that Chinese provincial governments have been engaged in an economically illogical and relentless make-work scheme of building new aluminium smelters which aren’t required. This has acted to keep aluminium prices at extremely low levels, such that a large proportion of global aluminium production capacity is losing money.

Secondly, Point Henry smelter had a subsidised electricity contract with the Victorian government which is due to expire this year. This contract tied the price of electricity to the global price of aluminium and the exchange rate, which is well below market rates. It has cost Victorian electricity consumers hundreds of millions of dollars over the last few years via a levy on electricity distribution businesses. A prior state Liberal government cabinet minister under both Hamer and Kennett, Robert Maclellan, said of these contracts:

“I don’t why we don’t just say, ‘These are sins of government past, of various political persuasions’. Let’s have it out in the open and not repeat the mistake and not lengthen the mistake.”

Thirdly, it seems the smelter has unfortunately fallen into a set of poor labour practices which seriously inhibit its productivity. A metallurgical engineer with management experience across both Alcoa and Rio Tinto aluminium smelters, including Point Henry, explained that even with completely new owners and management the workplace culture of poor productivity at Alcoa’s smelters was irretrievable. He said a sense of entitlement had reached extraordinary levels that were thoroughly embedded among the workers. To illustrate, he provided the anecdote of a worker at Point Henry who complained to him that his sleeping mat (which he used to sleep on the job) had been stolen several times by other staff. This worker felt this an outrage, especially as the union hadn’t done anything about the theft.

Even with repeal of the carbon price imminent, Point Henry seems bound to shut. No doubt blame will then shift to the Renewable Energy Target. Yet Point Henry is exempted from 90 per cent of the cost associated with both the carbon price and the RET. These policies are irrelevant compared to the three fundamental problems explained above.

When asked for ideas on how the government might respond to manufacturing closures, Tony Abbott has repeated on a number of occasions that he sees Australia’s rich domestic reserves of coal and gas as a source of cheap energy that could support manufacturing.

He’s dreaming. 

Australia’s gas supplies are now approaching prices similar to those in Europe based purely on private-sector market outcomes as a result of LNG facilities.

Our wholesale price of electricity on the eastern seaboard will become very cheap once Point Henry shuts, but that will be due more to a systemic oversupply of power capacity rather than underlying fundamentals of power supply costs. Eventually one of the power companies, facing a large maintenance bill on a decades-old coal power station, will have to blink and act to shut down capacity in order to revive prices for their other generators. 

Unless Abbott wants to wind back the clock to a time when the state used energy supply as an instrument of subsidised industry development (a time which his Liberal Party colleague Robert Maclellen says was “madness”) his idea of an energy-fuelled manufacturing revival in this country is a mirage.