27/06/2016 - 14:41

Refinery costs a threat to Kwinana

27/06/2016 - 14:41


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Kwinana’s future as an important centre of value-added mineral processing is being threatened by a potential double closure of major projects – the BHP Billiton-run nickel refinery and the Alcoa of Australia-operated alumina refinery.

Costs could hurt the Alcoa refinery’s future prospects.

Kwinana’s future as an important centre of value-added mineral processing is being threatened by a potential double closure of major projects – the BHP Billiton-run nickel refinery and the Alcoa of Australia-operated alumina refinery.

Neither company has made an announcement about plans to close (a move that would cost thousands of jobs), but last week’s trial shipment of unprocessed bauxite from Kwinana by Alcoa was the latest sign that a period of significant change might not be far away.

A few kilometres from the 50-year-old alumina refinery, the 45-year-old nickel refinery is already on life-support after BHP Billiton failed to sell its Western Australian nickel business, Nickel West, and is continuing to operate the refinery largely to prevent triggering a $1 billion environmental clean-up bill.

Weak global markets for most minerals and metals have combined with the high costs associated with old factories to raise doubts about the ongoing viability of the Kwinana nickel and alumina operations.

Compounding the challenge of keeping both projects operating are high domestic costs, which grew significantly during the mining boom. And while they are now subsiding, WA remains a high-cost location for processing raw materials.

The decision by Alcoa to test the market with a shipment of Darling Range bauxite has been promoted by the company as the potential start of a new business to complement exports of alumina from its Kwinana refinery.

Having two businesses – processed alumina and unprocessed bauxite ore – is a possibility, but it is also likely that profits from the far simpler function of digging and delivering ore will outweigh the costs of maintaining the most expensive of three refineries that Alcoa operates in WA.

While Alcoa does not disclose the financial details of the Kwinana, Pinjarra and Wagerup refineries, an investment bank did the job earlier this month.

According to Deutsche Bank’s analysis of the global alumina and bauxite industry, Pinjarra is one of the world’s lowest-cost refineries, with Wagerup not far behind. Both fall below the 50th percentile, which means they are in the lowest half of worldwide costs.

Kwinana, according to a graph produced by the bank, has costs that are exactly on the half-way mark.

Deutsche Bank research indicates that Pinjarra’s cash costs are this year running at around $US170 per tonne of alumina. Wagerup is at $US200/t and Kwinana is at $US235/t.

A complex business because of its three distinct stages (bauxite ore is refined to alumina, which is smelted into aluminium), there are separate economic forces at each level. The cost of energy is a critical factor, especially in the smelting phase, which requires large amounts of electricity.

Alumina is less energy intense, but does require a lot of heat and caustic soda to ‘digest’ the bauxite.

Those stages of processing mean that countries with cheap electricity are the best locations for aluminium smelting, with Canada and its hydro-electricity a winner, along with Middle East countries that use surplus gas to create the right economics for aluminium smelting.

Alumina refining has its own set of costs, with the biggest challenge in recent years being an excess of capacity in China, which has cut the price of alumina in that country.

Bauxite is in a different category again, and while power supplies have driven the construction of refining and smelting capacity in other countries, it is mining efficiency that dictates which country wins in the bauxite business – and that’s something at which Australia excels.

A hint of what might lie ahead for Alcoa in WA, with the old and high-cost Kwinana refinery in the firing line, can be found in changes to the bauxite/alumina/aluminium business of Rio Tinto in the Northern Territory and Far North Queensland.

Until 2014, Rio Tinto operated the 46-year-old Gove bauxite mine and alumina refinery, but the refinery was mothballed in that year and Gove became a bauxite-only operation.

On the other side of the Gulf of Carpentaria, the financial attraction of supplying unprocessed bauxite to more cost-effective alumina refineries in Asia has encouraged Rio Tinto to invest $US1.9 billion in its Amrun bauxite project, which is effectively an expansion of its Weipa bauxite business.

Economics and age are weighing heavily on Kwinana’s nickel and alumina refineries. In the case of BHP Billiton’s nickel refinery, profits are probably a distant memory, especially with the nickel price at $US4.07 a pound, less than half what it was just two years ago, and a quarter of its boom time price of close to $US20/t.

It’s a different situation at the Alcoa alumina business because, until recently, exports of Darling Range bauxite were not considered feasible (while it is relatively low grade, it has a chemical advantage in the form of low levels of reactive silica, which means it uses less caustic soda when being processed).

Clearly something has changed for Alcoa to be trialling shipments of bauxite from Kwinana.

Either refineries elsewhere have been adjusted handle Darling Range bauxite, or there is concern about a shortage of bauxite ore, or Alcoa can see that the Kwinana refinery is approaching its use-by date (as Rio Tinto did at Gove two years ago) and needs to be replaced by a viable business shipping unprocessed ore.

Profits from bauxite sales could extend the life of the Kwinana refinery, but for how long is a question that only Alcoa can answer.


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