Post date: Friday, 18th November 2011

Rio Tinto provides glimpse of an industry under pressure

Jacynthe Côté, Rio Tinto CEO

Jacynthe Côté, Rio Tinto's CEO, blames carbon taxes for the closure of the Lynemouth plant.

Rio Tinto Alcan blames carbon taxes for its decision to close its Lynemouth plant at a cost of 515 jobs, but the truth is more complex.

On Wednesday, the multinational company announced that it had given up its attempts to find a buyer for the site near Newcastle, after putting it on the market in October.

Local MP Ian Lavery has slammed the decision and demanded to know who the potential buyers are that Rio Tinto says declined to proceed with a purchase.

"If we can speak to those, and if we can get financial assistance from the government which has been promised, we could come up with some sort of package which would and sustain and maintain jobs here," he said.

Unions, too, said the decision had them "bewildered", since the plant is (just) profitable and contributes around £60m to the local economy.

Production at the smelter, which had been lowered in 2008-9 due to the global recession, was in the process of ramping up to its full capacity of around 175,000 tonnes a year.

Rio Tinto is holding a consultation on the plan that is due to last 90 days.

Its CEO, Jacynthe Côté, lay the blame for the closure on the rising cost of energy. “It is clear the smelter is no longer a sustainable business because its energy costs are increasing significantly, due largely to emerging legislation," she said.

Rio Tinto estimates the costs of this legislation as, from 2013 onwards, £46m due to the European Emissions Trading Scheme, and £10m due to the carbon price support mechanism.

But the argument that this is the sole reason for the decision is not convincing, for at least six reasons:

  • there has been a collapse of industrial metal prices since August, causing closures around the world
  • Rio Tinto is restructuring its entire aluminium business globally
  • the power station servicing the plant has planning permission for conversion from coal to biomass, thereby escaping carbon taxes and earning RO credits
  • Rio Tinto has a Climate Change Agreement with the government which gives it a huge tax break on the Climate Change Levy (CCL) and is saving energy
  • the plant is an old one in need of upgrade
  • Rio is paying the price for its poor purchase of Alcan in 2007.

The global picture

Since August, prices of all industrial metals, particularly aluminium, nickel and zinc, have fallen, and the sector has seen many announcements of production cutbacks.

There are concerns that these could increase if the global economic situation worsens.

The first deputy CEO of Russia's UC RUSAL, which is responsible for almost 11% of the world's primary aluminium output, said this week that 10-15% of world primary aluminium capacity will be shut down or mothballed if world aluminium prices remain at current levels into the first half of 2012.

Rio Tinto's response has been to restructure globally. Last month, it said it would sell off an estimated £5bn of aluminium assets to cut costs and will concentrate on higher-margin businesses such as mining bauxite, the ore from which aluminium comes.

The Lynemouth plant, 40 years old, is due for an expensive upgrade, and the company is likely to consider this measure to be not worthwhile in this market climate.

Rio Tinto Alcan was formed in 2007 when Rio Tinto bought aluminium company Alcan at the height of the credit boom. But this proved to be a very bad move, as it was forced to issue rescue rights to shore up its balance sheet and pay its debts.

Carbon taxation

The aluminium sector in the UK is actually performing well under the regime which the government is using to help it curb its energy use and save carbon.

According to the last set of figures (2010) for the CCA, the sector saved, in 2010, 2,346 kilo-tonnes of CO2.

It's not possible to see how individual plants performed.

The sector improved its performance by 28% on the previous year and met its carbon reduction targets. The conclusion must be that the legislation is working and the sector is saving money and energy; it has actually saved 8.2TWh (terawatt-hours) of energy compared to its base year of 1990.

It is therefore receiving a tax break on the CCL, which was at the rate of 80% until April this year, when the Chancellor reduced it to 65%, but it will revert back to 80% from April 2013.

Nevertheless Rio Tinto, along with other energy-intensive industries, has been lobbying the government for further help in reducing the impact of the proposed carbon price floor and EU-ETS, and the Treasury has promised to respond in the chancellor’s autumn statement on 29 November.

The timing of Rio Tinto's decision is therefore significant. Lavery said the coalition should have offered a package of measures sooner, and that by not acting quickly enough, it had let Rio Tinto “off the hook”.

Roger Salomone, energy adviser to the Engineering Employers Federation, commented on RT's move by saying: “There’s a real concern here that unless we rethink climate change policy we could be facing further job losses”.

A spokesperson from the Department of Energy and Climate Change called the decision “disappointing", but said "the cost of energy is an issue for businesses, not just in the UK, but across Europe, too".

"The overwhelming prime factor influencing the energy costs faced by businesses is the global wholesale price of fossil fuels”, not taxation.

The corporate affairs director of the Lynemouth site, John McCabe, said that environmental costs were “a big part but not all of” the decision. Other factors included labour and raw materials.

The potential purchasers of the smelter had, he said, reached the same conclusion: “It can’t be operated sustainably in the future”.

Conversion to renewable energy

The site also includes a 420MW power station, which employs 111 people and co-fires biomass. It has obtained planning permission to convert fully to burning wood pellets, at a cost of £50 million.

If this went ahead, it would be eligible for Renewable Obligation Certificates which, under the new proposed bands, would give it 1.5 ROCs per MWh until 31 March 2016 and 1.4 ROCs thereafter. A ROC is currently worth around £46.

There are also plans to install wind turbines on the site, which would also be eligible for subsidies.

Clipper Windpower hopes to erect the country's first super-efficient wind turbines, called the Liberty Wind Turbine, and ScottishPower Renewables has permission to build 13 wind turbines near the aluminium smelter.

The more complex picture, then, is of an industry struggling to cope with worldwide pressures on commodity prices, investment targets, energy prices and the need to move into a low-carbon future.

With the consultation still open, there is still time to find a solution that saves jobs in the area and provides the power and resources the country needs.

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