THE MOTHER OF IN­NO­VA­TION

The Australian Mining Review - - FRONT PAGE - REUBEN ADAMS

A pend­ing trade war, high en­ergy costs and an un­re­li­able NEM – a tri­fecta of po­ten­tial is­sues for Aus­tralia’s largest alu­minium smelter at Tomago. But buoyed by strong prices, Tomago Alu­minium’s strong in­no­va­tion cul­ture is driv­ing im­me­di­ate ben­e­fits and fu­ture-proof­ing the busi­ness.

STRONG pric­ing for alu­minium in 2017 was pro­pelled by de­mand from Aus­tralia’s largest con­sumer mar­ket China (32mtpa), which grew by 5.2 per cent year-on-year.

In De­cem­ber, the Of­fice of The Chief Economist fore­cast a 19 per cent in­crease in the value of Aus­tralia’s alu­minium ex­ports to $3.8 bil­lion for 2017-2018.

Aus­tralia’s fifth largest ex­port com­mod­ity re­mained steady in the New Year, with prices con­tin­u­ing to rally into Fe­bru­ary to reach their high­est level since 2012.

Then there was a pull­back on the Lon­don Met­als Ex­change (LME) in March as the US Gov­ern­ment es­ca­lated it’s ‘who blinks first’ ap­proach to in­ter­na­tional trade, putting world mar­kets in a tail­spin.

It may be pre-emp­tive to panic at the prospect of US tar­iffs on Aus­tralian steel and alu­minium – and the fall­out of a full-blown trade war with China – but at the time of writ­ing the Trump ad­min­is­tra­tion had down­graded Aus­tralia’s pre­vi­ously un­qual­i­fied tar­iff exemption to a ‘pause’ sta­tus.

To be fair, Mal­colm Turn­bull and Don­ald Trump had both ‘con­firmed’ Aus­tralia’s exemption via so­cial me­dia, but as AI Group chief Innes Wil­lox put it “this on-again, off-again and on-again stuff is no way to treat a se­ri­ous trad­ing part­ner”.

Tomago Alu­minium

The Tomago Alu­minium (TAC) joint ven­ture be­tween Pa­cific Alu­minium, Gove Alu­minium Fi­nance (CSR and AMP) and Hy­dro Alu­minium has been a Hunter re­gion main­stay for 35 years, op­er­at­ing 24 hours a day since 1983.

As chief ex­ec­u­tive of TAC, Matt How­ell has said he was less alarmed by the po­ten­tial fall­out from tar­iffs, telling the Fi­nan­cial Review in March that “we’ve got good strong con­tracts in place”.

A more press­ing con­cern for TAC and other Aus­tralian smelters is es­ca­lat­ing elec­tric­ity costs over the long term and – more im­me­di­ately – re­li­a­bil­ity of sup­ply.

Alu­minium smelt­ing is an en­ergy-in­ten­sive busi­ness. TAC is Aus­tralia’s largest alu­minium smelter and NSW’s largest en­ergy user, ac­count­ing for be­tween 10 per cent and 12 per cent of to­tal State power de­mand to pro­duce about 585,000 tonnes of alu­minium every year.

From a pric­ing per­spec­tive, TAC is cur­rently about four months into an 11-year hedge con­tract with en­ergy provider AGL.

Ac­cord­ing to a May 2017 re­lease from TAC JV part­ner CSR, based on this con­tract power costs would in­crease by about $250 per tonne of pro­duc­tion. Mr How­ell es­ti­mated the extra cost at $100m per year.

Smelt­ing is also frag­ile busi­ness. Re­li­able elec­tric­ity sup­ply is critical, and in­ter­rup­tions to a smelter’s sup­ply could cause a cat­a­strophic pot­line freeze in a mat­ter of hours.

This hap­pened in De­cem­ber 2016 at the Al­coa Portland smelter in Vic­to­ria, which lost about 70 per cent of cells due to a pot­line freeze dur­ing an ex­tended power out­age.

Portland’s fu­ture was only se­cured when State and Fed­eral Gov­ern­ments com­mit­ted to a $240 mil­lion res­cue pack­age in Jan­uary 2017.

On 10 Fe­bru­ary last year, TAC was forced to con­duct a man­aged shut­down to cut pro­duc­tion by 30 per cent – sav­ing 300 megawatts (MW) – to avoid black­outs in NSW, af­ter a num­ber of gen­er­a­tors failed and re­duced low priced sup­ply in NSW by 1200MW.

It took about a week for the smelter to re­turn to nor­mal op­er­a­tions.

In a July 2017 sub­mis­sion to the ACCC In­quiry on Re­tail Elec­tric­ity Sup­ply and Pric­ing, TAC claimed that 5500MW of NSW coal or gas-fired gen­er­a­tion had ex­ited the mar­ket in the last five years, chal­leng­ing the un­der­ly­ing vol­ume, and re­li­a­bil­ity, of elec­tric­ity sup­ply in the NEM.

Look­ing for­ward, TAC and other vested in­ter­ests are con­cerned that the 2022 clo­sure of AGL’s ag­ing Lid­dell Power Sta­tion in the Hunter Val­ley would re­move 1800MW of re­li­able baseload power from the grid.

TAC’s cur­rent 11-year hedge con­tract with AGL is in­de­pen­dent of what hap­pens to Lid­dell.

How­ever, AGL — prior to its ac­qui­si­tion of the Mac­quarie Gen­er­a­tion ( MacGen) as­sets in 2014 – worked from “con­ser­va­tive mod­el­ling as­sump­tions” that ma­jor cus­tomer TAC would close in 2017, which would mean Lid­dell was no longer re­quired af­ter that pe­riod.

It was an odd as­sump­tion to make, but this also helped drive the bar­gain $1.505 bil­lion price tag for MacGen; a pur­chase price which val­ued Lid­dell at $0.

By Oc­to­ber 2014 – post ac­qui­si­tion – for­mer AGL chair­man Jerry May­cock cor­rectly pre­dicted that TAC prob­a­bly would not close in 2017 as as­sumed.

“If the Tomago smelter re­mains open, then Lid­dell will con­tinue to op­er­ate and will pro­vide in­cre­men­tal prof­its to AGL over and above that as­sumed in our base case val­u­a­tion for Mac­quarie Gen­er­a­tion,” Mr May­cock said.

Soon af­ter, AGL be­gan aim­ing for a 2022 clo­sure at Lid­dell. AGL pro­posed to re­place Lid­dell ca­pac­ity with new wind farms and gas plants, bat­tery stor­age, and an up­grade to its Bayswa­ter coal gen­er­a­tor, which – by its own cal­cu­la­tions – would cost 20 per cent less to pro­duce than if Lid­dell’s life was ex­tended for five years.

The Fed­eral Gov­ern­ment has voiced its con­cerns about the im­pacts of re­mov­ing more baseload sup­ply from the NEM.

In March this year, Fed­eral En­ergy min­is­ter Josh Fry­den­berg said while AGL are will­ing to un­der­take all three stages of their re­place­ment plan, the 100MW Bayswa­ter up­grade is, ac­cord­ing to AEMO, the “only com­mit­ted re­source at this point in ac­cor­dance with cri­te­ria AEMO ap­plies for de­ter­min­ing new sup­ply”.

“With­out the im­ple­men­ta­tion of AGL’s full plan or equiv­a­lent in­vest­ment by oth­ers, AEMO has con­cluded there will be an 850MW short­fall in dis­patch­able power and in their words “a high risk of load-shed­ding” fol­low­ing the clo­sure of Lid­dell,” Mr Fry­den­berg said.

“The ex­is­tence of a ma­jor short­fall in dis­patch­able power fol­low­ing Lid­dell’s clo­sure would clearly present an un­ac­cept­able sit­u­a­tion un­der­min­ing the sta­bil­ity of the sys­tem.”

AGL stated that de­ci­sions for the in­vest­ments were staged to en­able flex­i­bil­ity to re­spond to the chang­ing needs of the mar­ket and im­prove­ments in tech­nol­ogy over the next five years.

A Cul­ture of In­no­va­tion

De­spite these po­ten­tial head­winds, TAC is still a strong, profitable busi­ness buoyed by LME pric­ing for alu­minium which – while volatile – re­mains about $US150 higher than the same pe­riod last year.

Ac­cord­ing to key per­for­mance in­di­ca­tors, TAC had also de­creased the amount of power needed to pro­duce alu­minium over the course of 2017, while metal pu­rity was on the in­crease.

The smelter is con­stantly search­ing for means to in­crease vol­umes, re­duce costs and avoid loss and waste.

To fa­cil­i­tate this, TAC has built and main­tained a strong cul­ture of in­no­va­tion that in­cen­tivises both em­ploy­ees and sup­pli­ers; an ap­proach that can pay huge div­i­dends over the long term.

For ex­am­ple – a num­ber of sig­nif­i­cant projects are help­ing to com­bat es­ca­lat­ing power costs.

One of the largest and most im­por­tant of these projects is the Pa­cific Alu­minium Low En­ergy Pot (PA-LE) pot, de­signed by the Pa­cific Tech­nol­ogy Cen­tre (PTC), which

could de­liver sav­ings of up to $10 mil­lion each year.

TAC has recog­nised that the key to a suc­cess­ful busi­ness is a strong sup­ply chain, and works with sup­pli­ers to find bet­ter ways to de­liver re­sults through con­tin­u­ous im­prove­ment and in­no­va­tion.

For the past 13 years the com­pany has re­warded these part­ner­ships – which in­clude more than 500 busi­nesses from the Hunter re­gion alone – at its an­nual Sup­plier Event Awards.

For its 950-strong work­force, the Tomago In­no­va­tion Awards are one way TAC re­wards those em­ploy­ees who con­trib­ute to this in­no­va­tion drive. And there are many; the com­pany’s Wins of the Week newsletter is re­plete with a num­ber of very im­pres­sive em­ployee-driven in­no­va­tions.

The Over­all Ex­cel­lence in In­no­va­tion win­ner for 2017 was pot­line oper­a­tor Nathan Be­vear, who de­signed a light­weight, un­hinged, re­mov­able alu­minium door to re­place the heavy hinged tap­ping doors on the 860 pots.

They were so suc­cess­ful the com­pany has or­dered at least 150 of them.

Mr How­ell told the New­cas­tle Her­ald that Mr Be­vear’s in­no­va­tion in­creased safety for em­ploy­ees, re­duced emis­sions, cut down on main­te­nance costs and showed Mr Be­vear as “an ex­tremely com­pe­tent de­signer and en­gi­neer”.

“As well as the safety and health ben­e­fits that are an ob­vi­ous part of the de­sign, Nathan’s re-done doors are cheaper to man­u­fac­ture than the pre­vi­ous doors and re­quire less main­te­nance,” Mr How­ell said.

Mr How­ell said this in­no­va­tion was a per­fect ex­am­ple of chal­leng­ing the ac­cepted way of do­ing things.

“In­no­va­tion is the lifeblood of suc­cess and I’m proud to say, we have some of the best in­no­va­tors in the busi­ness,” he said.

Then there was a pull­back on the Lon­don Met­als Ex­change (LME) in March but pric­ing for alu­minium re­mains strong.

AGL’s ag­ing 1800MW Lid­dell Power Sta­tion in the Hunter Val­ley is due for clo­sure in 2022. “The ex­is­tence of a ma­jor short­fall in dis­patch­able power fol­low­ing Lid­dell’s clo­sure would clearly present an un­ac­cept­able sit­u­a­tion un­der­min­ing the sta­bil­ity of the sys­tem.”

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