Foreign media on August 4 news, it is reported that Rio Tinto is discovering how difficult it is to produce low-carbon aluminum.
The company took an impairment charge of $1.175 billion at its two Australian alumina refineries in the second quarter.
This was partly due to what Rio called "challenging market conditions" for alumina. Alumina is extracted from bauxite and then fed into smelters to be converted into metal.
But it also depends on the cost of decarbonizing the company's two largest greenhouse gas emitters.
The short-term costs are reflected in Australia's new carbon tax on large industrial operators.
The long-term problem is that both Rio's alumina refineries and aluminium smelters depend on the national grid, which is largely powered by coal and gas.
This is the aluminum paradox. Metals, which are at the heart of the green energy transition, have a high carbon footprint, with the sector responsible for about 2% of all man-made emissions each year.
Carbon emission problem
Rio Tinto has admitted it is unlikely to meet its target of reducing group emissions by 15 per cent by 2025 without buying carbon credits, although it remains committed to a target of halving emissions by 2030.
The company's biggest carbon headache is its aluminium business, which emitted 21.1 million tonnes of carbon last year, out of a group total of 30.3 million tonnes.
According to Rio Tinto's 2022 sustainability report, Rio Tinto's Canadian smelter network draws its electricity from Quebec's hydroelectric system, meaning its Atlantic operations generated 4.8 million tonnes of carbon equivalent last year, half as much as its Pacific operations.
The Pacific region's two refineries, QAL and Yarwun, produced a combined 6.4m tonnes of alumina last year, accounting for half of Rio Tinto's primary direct emissions in Australia.
Together with the company's three power-consuming smelters, the Australian operations account for about half of the group's direct and scope-2 emissions, which include the carbon footprint of energy used in aluminum production.
Write-down of assets
Rio Tinto's impairment charge was $828 million after tax, including a full write-down of the Yarwun refinery and a $227 million impairment of the QAL plant.
The company is evaluating a major capital investment project at Qatar International Airport aimed at improving efficiency and reducing emissions. Rio said that if the so-called "double digestion" project did not go ahead, the business would also be completely written down.
The writedown was triggered by the Australian government's revised safeguard mechanism, which came into effect in July. The bill puts a cap on carbon emissions from some of the country's biggest emitters and forces them to pay for carbon offsets if they exceed the cap.
Rio Chief Executive Jakob Stausholm told analysts on the company's quarterly earnings call that this adds extra costs to businesses "where we don't actually make money."
The benchmark for calculating caps on carbon emissions is set to fall by 4.9 per cent a year until 2030, which the government hopes will give companies time to carry out decarbonisation operations.
Rio has won some concessions from the government on the grounds that its aluminium assets are a strategic part of the country's industrial mix, but its two refineries have yet to escape the negative financial impact.
jam
In addition to considering upgrades to QAL, Rio Tinto is also working with Japan's Sumitomo Corp to develop a project at Yarwun that uses hydrogen instead of natural gas.
The pilot plant will produce about 6,000 metric tons of alumina per year while reducing about 3,000 metric tons of carbon dioxide emissions per year.
However, this is an experimental technology and does not provide an immediate solution to the larger problem of decarbonising Australia's power grid.
According to the International aluminum Institute, the country's six alumina refineries will rely on coal or natural gas for 93 percent of their electricity generation by 2021.
Rio's three smelters and the Portland smelter, which is majority-owned by Alcoa of the US, are similarly closely linked to fossil fuel power generation.
The scale of converting the existing grid to renewable energy is daunting.
According to Stausholm, shifting Rio Tinto's operations to wind or solar would mean building a renewable energy park 12 times larger than anything Australia has built to date.
"So it's not a day-by-day problem," he told analysts.
Long-term threat
Rio Tinto is pursuing a number of ways to achieve greener aluminum in its North American operations.
It has partnered with Alcoa to produce aluminum using inert cathode technology, which will reduce Category 1 emissions during smelting.
The first commercial-scale prototype batteries have already begun construction at the company's Alma smelter in Canada and are expected to begin operations this year.
The low-carbon AP60 smelter, also in Quebec, will expand its capacity by 160,000 tonnes per year and is expected to come on stream in 2026.
Rio Tinto is investing heavily in recycling aluminium, which requires only 5% of the electricity needed to produce the original metal.
The company has just announced a joint venture with Giampaolo Group, one of the largest secondary aluminum operators in North America, to produce 900,000 tons of recycled metal per year.
But its Australian operations will remain an important brake on the company's journey to a low-carbon future.
Peter Cunningham, chief financial officer, said Rio considered the business "critical" to its wider portfolio.
It is also crucial for Australia, not only because of its size but also because, as Stausholm points out, it is "an industry that can underwrite a lot of renewable energy".
"But if we don't have access to reliable renewable energy at competitive prices, we won't be able to manufacture and export aluminium in Australia," he warned.
Rio's predicament neatly encapsulates the paradox of power facing aluminium producers everywhere. Going green requires green energy, which is currently not enough.
