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Power Subsidies and the Present Crisis in the Aluminium Industry

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It is a well-known fact that Aluminium smelting, which depends entirely on the fused salt electrolytic Hall-Heroult process is a bulk consumer of electrical energy. Electricity accounts for around 20 to 25 per cent of production costs of primary Aluminium. Industry experts and technologists have been constantly working towards improving the energy efficiency of the smelting industry.

Over half of global primary aluminum industry meets its needs from hydro energy sources which are cost effective, as well as non-pollutant. However, it has been observed that since the 1980s that green field primary Aluminium producing capacities are increasingly being located at raw material and/or power heads. A large number of new smelters are being located in emerging economy regions where cheaper coal /gas based power as well as work force is available.
Aluminum continues to be the world’s second most used metal. The industry is made up of some of the world’s most powerful companies like Alcoa, Alcan, Hydro, Chalco and RUSAL. Keeping in view the long term socio-economic advantages, aluminium producing countries are making electricity available to the aluminum producers at subsidized rates. However, with aluminum prices at the LME hitting their lowest levels during the first half of 2012, the power subsidies are no longer able to compensate the increasing input costs and shrinking operational margins. This is seriously affecting the economic viability of a large number of operating smelters, more so in the high cost economies of the west. Therefore, many aluminium smelters around the globe are considering output cuts to withstand the pressure of continuing operational losses.
Under this crisis like situation many national Governments, including those in China and Australia have been heavily subsidizing loss making smelters by providing electricity and thee fuels at heavily subsidized rate. This is being done keeping in view the adverse socio- economic impact a closed smelter can create in a region; more so, when the world is already passing through sever recessionary trends. However, this is now being seen to be working counter to the purpose of reviving industry’s financial health. Continuing with production at optimum levels with the help of power subsidies is in fact leading to oversupply of aluminium in the market, resistance to achieving economically viable prices and further adversely affecting the operational viability of smelters worldwide.
The happening in the Aluminium industry in Australia have a far reaching effect on the global Aluminium industry. Of late, the Australian Aluminium industry has been facing magnified impact of a number of politicized regulations and widely shifting Governmental policy decisions. One of the major driving factors behind the profit of aluminium smelting in Australia has been the lower power costs. Most Australian producers have been paying a very low electricity rate for decades as the rate has also been subsidized by legacy of state government contracts. For example, Alcoa has been enjoying highly subsidized electricity rate for Point Henry and Portland smelter with the help of an agreement made by the Liberal government in 1979. This deal has continued for years, but presently they have just added $2.45 to every MWh sold in Victoria. One of the reasons why Hydro’s Kurri Kurri smelter has brought the shutter down is that they could no more avail the subsidized electricity rate from the government with the contracts coming to a close.
The Baillieu government urged for further electricity rate subsidies and has put pressure on the federal government to provide more carbon tax compensation to save Alcoa’s Point Henry operation in Geelong. Finally, the federal government has decided to keep the smelter open after offering a $40m assistance package. Now, Victorians will have to pay a carbon tax bill of $60 to $70million every year for the power used by Alcoa’s aluminium operations, including that at the Point Henry smelter.
The level of public subsidies that Alcoa has been enjoying for decades in Australia has been difficultto track. Power contracts have been fixed for Portland and the Point Henry smelter, which have been consuming about one-fifth of the state’s power since the early 1980s. According to this agreement, electricity rate were to vary with the LME price fluctuations and as a result of the continuing low LME prices, civic consumers have had to pay higher taxes and power rates to help maintain viability of electricity generation operations in the region. In the past, a low global aluminium price would be accompanied by a low exchange rate. But, in the present situation, a low aluminium price is accompanied by a very strong dollar and oversupply of stocks. All this is putting the Australian and the global aluminium industry in a critical position in economic terms.
Energy accounts for over 40 percent of the overall primary aluminum production costs in China, which now produces and consumes a major part of global aluminium production. Rising tariffs have here also added to the pressures of shrinking demand and low prices in the local markets. A number of aluminium producing provinces introduce higher power subsidies to reduce hefty electricity bills of the aluminium industry. Central China’s Henan Province is offering a heavy subsidy to its smelters. Elsewhere, Yunnan and Sichuan provinces are also considering the same. Guizhou Province has already introduced enhanced subsidies. While the subsidies will help smelters reduce their cost of production, profit margins could still be affected by a further fall in LME and Shanghai Commodity Exchange prices caused primarily by an oversupply in the market.

Indian aluminum producers strongly believe that the subsidies granted by the Chinese and Australian governments to domestic aluminum smelters are partly responsible for the recent distortions in the international aluminum markets. They are contributing towards oversupply and are having a negative impact on Indian aluminum producers. These protective measures by Australia and China are causing downward movement of price and negatively impacting the global market technical.

However, as of now, indications are that Indian aluminum producers would not go for a major cut in output despite LME prices having lately come down close to even below breakeven levels for most producers. They are still hopeful for a turnaround in the second half of the year driven by a growing domestic demand.

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