Word has come through that Alcoa’s Point Henry smelter will get a reprieve for 2 years.

A combined package from the Victorian and Australian governments will inject AU$40 million into the plant. According to a report in the local press, the money will be used for plant upgrades, “staff development” and energy efficiency projects.

But 60 to 65 jobs will go, and Alcoa must operate the plant at the same levels as currently, or risk repaying the government. There was no word on what would happen after the 2 years expires. Presumably there is a view that metal prices would be back up above $2200 - $2400. Point Henry would need that sort of level from the LME for it to be profitable.

Taking the plant capacity of 220,000 tonnes, and splitting the $40 million over 2 years, it represents a reduction in operating costs of about $90 per tonne. With the LME sitting around $1850 (3M), it means there is still a significant distance to get to black ink. Various estimates that we have seen put Point Henry’s operating costs at about $2400. Of course climbing premiums help cover some of that gap, but it certainly seems as if Alcoa has had to at least match the Government package.

It is certainly good news for the local community (declaration of bias - I grew up in that town and worked at Point Henry almost 14 years). Outside the public service, Alcoa is probably the largest employer in the nearby city of Geelong, which has had 2 decades of bad news - financial disasters, manufacturing industry decimated.

The government rescue package pales into insignificance however, when compared to the Henan Government’s rescue package here in China. That package has a price tag of up to US$330 million for 7 months, and protects probably 3,000 jobs, compared to about 540 in Australia, as we discussed in a recent post.

The news that the various levels of Australian government might step in to save Point Henry must be case of mixed blessings for Alcoa. I suspect it may put them in a difficult situation, when it comes to share price and market outlook. Saving Point Henry means capacity cuts are needed somewhere else.

After announcing capacity cuts at the start of the year, Alcoa has put off the shutdown in Italy and are holding out for lower power costs in Brazil. Now with talk of Point Henry being saved, it leaves them with a total capacity cut which is barely half the 12% they announced at the start of the year. So as they save jobs in Australia, which is great for the workers and the local community, the LME price weighs down further. There is still too much metal on the supply side of the equation.

(Sure, a lot of that metal is now frozen in finance deals, and it could be argued, as one CEO said to me, that a sale to a finance house is as good as a sale to a can company, but if the global economy stutters - not an unlikely scenario - and the contango slips into backwardation, that metal will come out of the finance houses very quickly.)

So Alcoa can only hope for someone else to take a haircut on capacity. But who? Rusal has been talking of capacity cuts for some months, but so far, no action to match the words. Rio is having its operational problems, but is pushing ahead with capacity increases in Kitimat, Cameroon and their new AP60 plant. Middle Eastern smelters are expanding, thanks to low cost energy. And Chinese smelters are now getting subsidies from local governments, which in some cases are 20% of their electricity price.

So as the Australian government works out a lifeline for Point Henry, most likely it will simply mean transferring the pain to another part of the world. Alcoa will need to set the example, as one of the few “aluminium-only” corporations in the top echelon of the aluminium world. They will need to take a haircut somewhere else, reduce the supply side of the equation, and be seen to be matching their words and their actions.

Otherwise, with the LME now heading further south, they risk the perception that they have failed to act decisively. Indeed, some analysts are already downgrading the company’s earnings outlook.

It’s a difficult call for the folks at the New York headquarters.

Australian newspapers this morning are predicting that there will be an announcement as early as this week regarding the future of Alcoa’s Point Henry smelter. And the prediction is that the Victorian State Government, possibly with the assistance of the Australian federal government, will come to the aid of the loss-making smelter.

Alcoa put the smelter under review a few months ago, as part of its review of assets in comparison to the outlook for metal price. Point Henry suffers from age (it is almost 50 years old), the relatively high cost of the Australian dollar, and the combined effects of the cost of electricity and the impending carbon tax (although, to be fair, the carbon tax was not cited as a cause.)

With LME prices below $2000, and the cost of production at Point Henry running well above that, the outlook was grim. Alcoa had been making noises about cutting capacity, in light of the glut of metal stuck in warehouses around the world, though the actual cuts that it has made have been somewhat less than the rhetoric. If a deal is struck in the case of Point Henry, it will be a great day for workers, and the local community (declaration of bias - I grew up there, and spent the first 13 years of my working life at that smelter), but it will do nothing for the dialogue currently under way around the world, that more capacity needs to come out of the global equation.

It will however bring Alcoa a small filip - the metal units from Alcoa that aren’t already committed can go into Japan, where premiums are north of $200. Of course, casting and shipping costs have to come out of the premium, so it’s not like there’s enough in there to make Point Henry tip into the black, but at least Japan premiums are negotiated quarterly, locking in the high price for three months, unlike other markets where premia move daily.

Soon as news comes of any deal for the smelter, we will bring it here.

Alcoa yesterday announced that it is reviewing the viability of its smelter at Point Henry. The review is expected to be completed by June, but with the smelter already losing money, and with a strong Aussie Dollar and the prospect of a carbon tax, the likelihood is that the smelter’s days are numbered.

While it makes sense from a macro economic point of view (cut your high cost assets, invest in lower cost assets elsewhere), it has all sorts of repercussions on all sorts of levels.

Point Henry employs around 600 people (it used to have as many as 1,000) and is the biggest employer in the local city Geelong. Geelong was once a major industrial centre, with International Harvester (tractors), Pilkington Glass, Ford Motor Company, Shell Refinery and a host of smaller factories. In those days, the Point Henry smelter was considered as a mid-sized employer. But the effects of manufacturing’s shift to low cost countries, plus some bad financial crashes to local Building Societies, devastated the city. Unemployment skyrocketed, and it took the Government investing in new R&D centres in the area to stop the economic slide. The loss of 600 jobs in Geelong will be catastrophic.

It will also have some folks inside the State Government scratching their heads. The Victorian Government has been providing power to the Alcoa smelters at a discounted price. Point Henry’s power comes from a combination of a small power station in nearby Anglesea, plus from the big power stations on the other side of Victoria. But those power stations run on brown coal, generally considered to be the poorest and most polluting form of thermal coal.

The folks in State Government are therefore probably wondering how a reduction in demand might be used to fullest advantage - if any advantage can be found. Reduced brown coal burning is good for the atmosphere, and reduces the Government’s exposure to green interest groups and carbon tax pressure, but it also reduces Government income. And since smelters provide a useful base load for power stations, the daily peaks and falls of consumption may rise correspondingly.

But of more political concern, the loss of 600 jobs (plus as many as 10 times more in support industries) is likely to equate to the loss of at least 2 seats in Parliament. And they are probably also wondering whether this announcement, and the June timetable, is designed to put pressure on the Government to find ways to further support the smelter. I wonder who will call who first - is the Government waiting for Alcoa to pick up the phone? It’s going to be an interesting discussion on tactics.

Finally, on a personal note, the closure of Point Henry is sad news for me too. I spent almost 14 years in that place. I joined back in the days when Alcoa sent the employees they didn’t want in their US smelters to Australia, to get them out of the way. I remember one guy who walked around the rolling mill with his “nigger knife” quote unquote. Disgusting man. Another, perhaps less disgusting but equally unsuitable, was the Plant Manager, Jack Lang. He was in charge when the plant suffered about 3 months of rolling wildcat strikes, where we staff members were forced to work the day in the office, and the night in the potrooms.

But there were some others who came out from the USA who were genuine gentlemen. I remember P Clarence Ames in the carbon plant, went by his second name because “Who wants to be called Philo?”

But there were plenty of locals who added colour and life to the plant. Rob Helmore, Ken Mansfield, Jock Irvine, Hugh Aspley, Hans Ykema, Phil Robinson, Bob Jennings, Theo Koenings, Mary Donaldson, the Willing twins, and countless others left their mark on my outlook on life in their own ways. I have so many memories, so many fun times, so many dark times (I had a brief stint as the photographer at the worst industrial accidents there), and so much aluminium in my blood as a result of my time there. It will be sad to see the old stamping ground go.