I’m trying to avoid commentating too much on current policy these days, but sometimes I just can’t resist. Especially when it’s related to industrial policy, sovereign capacity, or whatever the latest rent seeking buzzword happens to be.
Anyway, I recently wrote about the federal electorate of Kennedy’s banana subsidies. Not a week later, and lo and behold and the residents of Kennedy are after more, this time for copper:
“[Mt Isa mayor] Peta MacRae and other North Queensland leaders travelled to the capital on Wednesday to lobby Industry Minister Tim Ayres, Resources Minister Madeleine King and Energy Minister Chris Bowen for a multibillion-dollar bailout to rescue Glencore’s copper smelter.”
Glencore is a Swiss company that is threatening to shut down the Mt Isa copper smelter and Townsville refinery “as soon as September”, mostly because the projects are expected to lose a combined “$2.2 billion over the next seven years”.
Why is it expected to lose so much after five decades of profitable operations? As the article makes clear, the copper mines that feed the smelter are out of ore, so now it has to buy feedstock. But without a captive mine, Australian smelters and refineries just aren’t all that competitive due to our relatively high costs (e.g. labour, energy).
Economically, the best thing to do would be to let it fail. Australians would be better off if the workers and capital being used at an unprofitable Mt Isa were freed up for other businesses (to be clear not everyone will be better off—more on that below). That’s just basic comparative advantage: we raise living standards if we specialise in what we can make at a low opportunity cost and trade for what we can make only at a higher cost.
There’s just no economic case for a subsidy—the mine has reached its end of life, and the smelter and refinery that depended on it should probably follow.
That leaves just one argument for a bailout: national security, which is a popular one for lobbyists in the mining and industrial sector to exploit because it’s intuitive to the public (“we obviously need domestic capacity in case of war!”), making it easier for politicians to buy into.
Enter Claudia Brumme-Smith, chief executive of Townsville Enterprise:
“The Chinese are playing with market conditions and distorting the market and every smelter in the world right now is not viable, but most countries are choosing to bail their smelters out because they know that if you let copper go, you let the future go… We have seen Whyalla and Nyrstar in Tassie being given a lifeline, we are asking for the same treatment.”
China is “distorting the market” for copper the same way it “distorted the market” for steel: through enormous capacity expansion. Given the efficiency of Chinese industry at this scale, it’s absolutely true that marginal smelters without a captive supply of ore will struggle to compete.
But should the government keep them afloat? The case isn’t as strong as you might think: copper is extremely durable, so can be stockpiled if national security were truly a concern (do it transparently on the Defence budget!). But in terms of Mt Isa, the case is even weaker still because Australia already has a smelter and refinery in South Australia, along with a captive copper mine that has hundreds of years’ worth of supply remaining.
If the goal is to secure a supply of copper in a worst-case scenario, subsidising an inefficient plant just isn’t the cheapest or smartest path: every dollar spent propping up Mt Isa is a dollar not spent improving “sovereign capacity” elsewhere, such as building actual Defence capacity.
Now, to touch on an issue I mentioned earlier: there will be losers from letting Mt Isa fail. Glencore, obviously, but they’re Swiss so no one is likely to shed a tear there. But many of the workers will definitely lose out, at least in the short run—they clearly like what they do, which is why so many have refused to accept Glencore’s offers to relocate them to other parts of the business.
I often write that governments should support workers, not jobs. The same is true here: an appropriate policy response would be to acknowledge that the facilities are going to shut down and offer support for the affected workers (e.g. through relocation assistance or retraining), not the mine or its owners. As painful as it is for the workers, geography and sunk costs shouldn’t dictate policy, and in the long run propping up a town with no sustainable economic base risks locking people into a low-opportunity future.
Look, I get that Kennedy is an influential electorate. But if Mt Isa gets a bailout, it will send a costly signal that there’s no project in Australia that the Albanese government won’t ‘rescue’, and our “sovereign capacity” will be considerably weaker because of it.
If this is the future, then I agree with Brumme-Smith that we should let it go—and put those billions into building a stronger one elsewhere.