A DARK cloud hangs over the future of Bell Bay Aluminium smelter, with an economic storm looming similar to the one that flattened the state's woodchip industry.
About 500 workers' jobs are in jeopardy, despite the smelter benefiting from a generous power contract signed with Hydro Tasmania this year.
The smelter cut 12 jobs this month, making the announcement in the same week the state reached its highest unemployment rate since May 2003, at 8.1 per cent.
Low prices, increasing costs of production and a high Australian dollar have hit Bell Bay hard and contributed to a national industry meltdown since 2008.
UBS industry analyst Daniel Morgan says pressure on Bell Bay and the Australian industry is rising. "The aluminium industry is beset by oversupply," Mr Morgan said.
Australian Workers Union national secretary Paul Howes has described Australian aluminium smelting as a "huge disaster zone".
Bell Bay plant manager Ray Mostogl has described market conditions as "extremely challenging", saying recent job cuts were part of an efficiency drive to make the smelter competitive.
But workplace efficiencies and cheap power may not be enough to save the smelter in a global market awash with cheap aluminium.
Even recent devaluation of the Australian dollar may not be enough to secure its future.
In the past two years smelters have closed in the US, Spain, England, Italy, Netherlands and Norway. The global storm hit Australia last year with closure of the Kurri Kurri smelter near Newcastle.
There are now five Australian smelters, including Bell Bay and all are struggling.
Revenue from Australian smelters has dipped 10 per cent a year since 2007-08.
The Bell Bay smelter, part of Rio Tinto's Pacific Aluminium group, is the smallest in the nation, producing about 177,000 tonnes a year compared to Boyne Island in Queensland, which produces 556,000 tonnes a year.
Rio Tinto has been reviewing the performance of Pacific Aluminium, which controls smelters in Australia and New Zealand, for the past year -- and the numbers do not look good, with a loss of about $500 million looming.
The big contributor to widespread aluminium woes is the emergence of China as an economic powerhouse willing to throw its weight around.
While smelters worldwide consider scaling back or closing in the face of the glut, China is ramping up production. It increased its capacity from 4.3 million tonnes in 2002 to 18.1 million last year and is now the world's biggest producer and consumer, raising its share of world production from 16.5 per cent in 2002 to 42.3 per cent last year.
China's expansion is set to accelerate with exploitation of a big deposit of cheap thermal coal in the country's northwest expected to drive construction of more smelters.
Mr Morgan said China consumed much of its own production and expansion of its export capacity would create even more difficult market conditions.
"China's growth in production has been spectacular, but it's not currently a headwind for the Australian producers," Mr Morgan said. "China's production is immense, but it is currently contained in their domestic market. Trade flows of primary metal are insignificant, both import and export.
"The rest of the world supply glut is hurting Australian producers more."
The centralised Chinese government provides big power subsidies for smelters to insulate their capacity against low prices. With smelters worldwide turning to government largesse and power subsidies, it could become a competition between smelters in a command economy, with both feet in the world's free markets, and those from market economies dependent on taxpayer aid.
The defining factor of survival could be whose pockets are the deepest.
Mr Morgan said governments were keen to keep smelters, and stand-alone economics did not drive where they were sited.
"Politically, an aluminium smelter is a high-profile source of jobs," he said.
"But also for the broader economy, a smelter facilitates economies of scale in power production and is a big, stable user of the power grid. This benefits everyone in the community indirectly.
"So any announced closure leads to the government taking a carrot-and-stick approach, explicit subsidies or enforcement of long-term contracts."
Mr Morgan said although the centre of aluminium production globally was moving to China and cheap energy centres like the Middle East, there was still hope for the Australian industry.
"If Australia can compete on energy costs and technology, then there is a future," he said.
"However, Australia's competitiveness is being eroded on energy costs, from the combination of gold-plating of transmission infrastructure, renewable energy schemes and carbon policy."
simon.bevilacqua@news.com.au
