The hard truth: why the government should let this smelter fail

The Tomago smelter is in trouble. Although the expiration of its energy contract is still more than 3 years away, the owner (Rio Tinto) has already indicated it is “yet to identify a pathway that supports commercially sustainable operations beyond 2028.”

Governments of all stripes have responded as governments do in these circumstances, promising all kinds of taxpayer support to keep the lights on.

To date, Rio Tinto have indicated that these support packages are not sufficient as they don’t deal with the cost of electricity from 2029 onwards. No doubt government boffins are in the back room crunching the numbers, both in Sydney and Canberra, to see how much more of your money they can give away.

Instead, Tomago smelter should be allowed to close. Even if this approach eventually leads to the loss of the whole industry, so be it.

At its core, the problem seems fairly simple. Energy prices have risen substantially in recent years across the board, as all energy consumers are unhappily aware.

Although major power consumers like the Tomago smelter negotiate commercial supply contracts, and so face very different prices to your typical suburban home, prices must reflect market reality.

The aluminium smelting industry needs low-cost energy to be viable. It is a major energy consumer; Tomago uses more than 10% of NSW’s electricity and energy costs are the biggest factor in profitability. The loss of lower cost energy is an existential challenge to the industry.

There is simply no reason for the government to try and stand against this wind.

Whatever the industry and its cheerleaders say, and however sad it would be for the facility’s workers and the communities around them, the smelting industry is no more important to Australia’s economy than any other.

Or to put it another way, if Tomago meets the criteria for a taxpayer bailout, then so do thousands of other businesses. The government will be back in the business of propping up unviable companies (if it ever really left).

Statistics produced by the Australian Aluminium Council show that the overwhelming majority of aluminium produced by the industry is exported (1.5 million tonnes out of 1.58 million produced). It is not the lynchpin of Australian production.

While 1,000 jobs (with thousands more ‘indirect’ jobs) seems like a lot, the number should be put in context. Jobs and Skills Australia estimated that there were approximately 368,000 jobs in the Hunter region as at June 2025, meaning Tomago employs less than 0.3% of people in the Hunter region.

And the Hunter has already shown its ability to recover from industrial change. Although it took a couple of years, the region saw a renaissance after the closure of the BHP steelworks in 1999, with lower unemployment, stronger growth and the development of new industries.

Nor are there national security reasons to keep it open. Even if Australia needs a sovereign smelting capacity, currently we are the seventh largest global producer. A small domestic operation sufficient for our needs would cost a fraction of what is already being offered to the industry.

Any money government wanted to offer in these circumstances should be strictly limited to transition support for affected workers to enable them to find new jobs as quickly as possible.

So where is the pressure for a bailout coming from?

The federal government continues to maintain its absurd dreams that Australia will be a “renewable energy superpower”. Combined with its equally economically-bankrupt “future made in Australia” agenda, it is politically vulnerable to requests for subsidies to maintain high energy-use manufacturing, lest they and the punters be mugged by reality.

Nor should union influence be ignored.

Unions have always gone hand-in-hand with handouts in the manufacturing sector. As we saw with the car industry, and countless others, the unions have used their political muscle to leverage government support. In exchange for this support, manufacturers have had to give way on overly-generous pay increases.

Unfortunately, in this case as in so many others, the economics are against them. There is no good reason to believe Australia will regain its energy competitiveness any time soon.

If nothing else, if there were good commercial reasons to believe prices would be competitive in the foreseeable future, there would be no reason to shutter the smelter at all. Business often endures brief periods of unprofitability in expectation of future returns. That’s basically the entire business model of the minerals exploration industry.

To be clear, the loss of low-cost energy is almost entirely the result of Australia’s policy choices, specifically the choice to transition energy generation to renewables.

Although the government previously produced some modelling that showed prices falling, the reality is price rises were both inevitable and predictable.

There is also no doubt a lot of wasteful spending in the transition planning. This too is an inevitable and predictable consequence of government bureaucratic planning; especially when motivated by ideological (or perhaps more accurately ecological) concerns over economic ones.

The government has already offered billions in support to the smelting industry with no clear benefits. At a certain point we must stop the madness of raising cost pressures with one set of policies, while bailing out those affected by those policies with others.

Indeed, one might conclude that a diligent opposition would gain more ground focusing on these flaws rather than obsessing over whether they support some notional target 25 years in the future.

Simon Cowan is Research Director at the Centre for Independent Studies.