Less cost, less coal: why global rivals are killing Australian aluminium

The impact of carbon pricing

And then there is climate change. With the exception of Bell Bay in Tasmania, which uses hydro power, Australia's smelters produce 15-20 tonnes of carbon dioxide per tonne of aluminium because their electricity comes from fossil fuels, mainly coal. This is two to three times the global average. A carbon price of A$20-30 per tonne has a noticeable impact.

Around the world, newly-built smelters have used gas, hydro, geothermal or nuclear power, with low or near-zero emissions. New production has also been targeted to places such as the Middle East, Canada and Iceland with lower electricity prices because there are relatively few alternative uses for the electricity.

This means that arguments to protect Australia's aluminium from carbon pricing, based on the idea that the emissions will leak to another country, are likely to be wrong. The emissions may well be driven overseas by cheaper pricing, but those emissions are also likely to be significantly reduced as a result.

Together, these factors drive Australia's smelters into the bottom 25% of global competitiveness.

A bleak future

With two of Australia's six smelters now gone, what are the ramifications if the other four follow suit? For the electricity sector, which is already under pressure from falling demand, losing a customer base representing around 15% of the market would be a big blow.

As the global aluminium market further evolves and climate change policies become serious, the viability of aluminium smelting in Australia looks challenging. There are clear consequences for a sector that directly employs around 4,500 people and generates some A$5 billion in exports.

An intriguing alternative picture was painted by the 2008 Garnaut Climate Change Review. A long-term positive future could emerge for aluminium production in Australia if rising carbon prices drive a low-cost, emissions-free electricity supply sector in Australia.

But in the context of current climate change politics, with carbon pricing set to be repealed and the Renewable Energy Target now under review, this prospect seems frustratingly far away.