How Are Australian Aluminium Smelters Performing amid Power Supply Shortage?

SHANGHAI, Jun 16 (SMM) - Australia is currently facing power shortages, according to a news release from the Australian Energy Market Operator (AEMO) on June 14 local time. The Australian Energy Market Dispatch Centre, which is responsible for energy regulation, reportedly stated that five states across the country are under threat of power shortages, including Queensland, New South Wales, Victoria, South Australia and Tasmania.

The outage follows a cap on wholesale prices imposed by AEMO on Sunday night, which led to the shutdown of a number of coal and gas-fired power plants. The cap was imposed because wholesale electricity prices in Queensland, New South Wales, Victoria and South Australia were rising too quickly. At the same time, this restriction made suppliers unable to cover their costs and reduced the amount of energy available to power plants, forcing them to restrict power and directly leaving residents without electricity.

Why is Australia, a global energy powerhouse, experiencing power constraints?

① Australia is rich in coal and natural gas resources. But with the global advocacy of new and clean energy power, the country's domestic thermal power plants operating rates are weakening, which, coupled with the fact that around 25% of thermal power plants on the east coast are under maintenance, significantly hurt the country’s power supply capacity.

②The Russia-Ukraine conflict has led to sanctions on Russian gas, causing a surge in demand for Australian gas from various countries and resulting in a decline in the country's own gas reserves.

③ Extensive cold waves in Australia during this period increase the demand for electricity.

According to SMM data, the four Australian aluminium smelters have a combined capacity of 1.722 million mt, and these smelters are distributed in areas impacted by the current round of power shortage. The current power supply tension caused by the emergency power outage is limited to residential electricity only, and the four smelters are producing normally. Whether the smelters will be affected by the power shortage in the near future depends on their power supply structure.

Australia's largest aluminium smelter Tomago Aluminal's power source is mainly with AGL, according to relevant information. The smelter’s power supply under long-term orders will expire in December 2028, hence it is little impacted by the power outrage.

Gladstone's Boyne: Approximately 85% of the smelter's power comes from Gladstone Power Station, which is 42% owned by Rio Tinto. The remainder of the smelter's required power sources is purchased from the spot market, which is the headache for Boyne.

Bell Bay Aluminium Smelter: The smelter entered into a 13-year power supply agreement with state-owned electricity supplier Tasmanian Hydro in June 2012.

The Portland aluminium plant (Alcoa) signed a 5-year power supply agreement with AGL, Alinta Energy and Origin in early August 2021.

Generally speaking, the current aluminium smelters in Australia mostly secure their power supply through long-term agreement, mitigating the risk of production cuts brought about by electricity shortage. However, soaring energy prices are also boosting the prices of electricity, which leads to growing electricity costs for aluminium smelters.

And at this stage, the price of LME aluminium continues to fall, and hit the multi-month low several times. Overseas aluminium smelting profits have narrowed, and some have already suffered losses in light of high power costs. Therefore, we cannot rule out the possibility that long-term losses may result in volunteered production cuts of aluminium smelters.

In other words, although the aluminium smelters in Australia secure power supply through long-term orders, the prices of electricity will also be subject to cost fluctuations. Therefore, production cuts may happen when electricity costs rise to an unacceptable level. SMM will continue to monitor the operating rates of overseas aluminium smelters.