LONDON - Rio Tinto is finding out just how hard it is to produce low-carbon aluminium.

The company booked a $1.175 billion impairment charge against its two Australian alumina refineries in its second-quarter results.

This is in part down to what Rio Tinto called "challenging market conditions" for alumina, which is refined from bauxite and then fed into a smelter for conversion into metal.

But it is also down to the cost of decarbonising two of the company's biggest greenhouse gas emitters.

The short-term cost comes in the form of Australia's new carbon tax on big industrial operators.

The long-term problem is the dependence of both Rio's alumina refineries and aluminium smelters on a national power grid that is largely driven by coal and gas.

Such is the aluminium paradox. A metal that is core to the green energy transition comes with a heavy carbon footprint, the sector accounting for around 2% of all man-made emissions every year.

CARBON PROBLEMS

Rio Tinto has conceded it is unlikely to meet its 15% target for reducing group emissions by 2025 without buying carbon credits, although it remains committed to its goal of cutting emissions in half by 2030.

The company's biggest carbon headache is its aluminium business, which last year accounted for 21.1 million metric tons of carbon emissions out of a group total of 30.3 million metric tons.

Rio's Canadian smelter network draws power from Quebec's hydro-electric system, meaning its Atlantic operations generated 4.8 million metric tons of carbon equivalent last year, half the amount produced by its Pacific operations, according to Rio's 2022 sustainability report.

The two Pacific region refineries, Queensland Aluminium (QAL) and Yarwun, with combined alumina production last year of 6.4 million metric tons, are responsible for half of Rio's Scope 1 direct emissions in Australia.

Together with the company's three power-hungry smelters, the Australian operations represent around half of the group's direct and Scope 2 emissions, which include the carbon footprint of energy used in the aluminium production process.

WRITE-DOWNS

Rio's impairment charge, which comes in at $828 million after tax, comprises a complete 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 QAL aimed at boosting efficiency and cutting emissions. If the so-called "double digestion" project doesn't go ahead, the operation will also be fully written down, Rio said.

The trigger for the write-down is the Australian government's revised Safeguard Mechanism, which came into force in July. It sets carbon caps on some of the country's biggest emitters, forcing them to pay for carbon offsets if they breach the upper threshold.

That imposes extra costs on a business in which "we're actually not really making money", Rio Tinto CEO Jakob Stausholm told analysts on the company's quarterly results call.

The baseline for calculating the carbon caps will decline by 4.9% each year until 2030, which the government hopes will allow companies time to decarbonise their operations.

Rio has won some concessions from the government on the basis that its aluminium assets are a strategic part of the country's industrial profile, but its two refineries have still not escaped the negative financial impact.

GRID-LOCK

As well as looking at an upgrade at QAL, Rio has partnered with Japan's Sumitomo Corp on a project to use hydrogen rather than natural gas at Yarwun.

The pilot plant will produce around 6,000 metric tons of alumina per year while cutting carbon dioxide emissions by about 3,000 metric tons per year.

This, however, is experimental technology and doesn't provide an immediate solution to the bigger problem of decarbonising Australia's grid.

The country's six alumina refineries were 93% dependent on coal or gas power in 2021, according to the International Aluminium Institute.

Rio's three smelters and the Portland plant, majority owned by U.S. producer Alcoa, are equally tied to fossil fuel power.

The scale of converting the existing grid to renewable energy is daunting.

Switching Rio's operations to wind or solar would mean building a renewable energy park 12 times larger than anything so far constructed in Australia, according to Stausholm.

"So it's not something you just solve from one day to another," he told analysts.

LONG-TERM THREAT

Rio is pursuing multiple paths towards greener aluminium in its North American operations.

It has partnered with Alcoa on producing aluminium using inert cathode technology, which will reduce Scope 1 emissions in the smelting process.

Construction of the first commercial-scale prototype cells has begun at the company's Alma smelter in Canada with operations due to begin this year.

Capacity at the low-carbon AP60 smelter, also in Quebec, will be expanded by 160,000 metric tons per year, with commissioning expected in 2026.

Rio is investing heavily in recycled aluminium, which can be remelted using just 5% of the power needed to produce virgin metal.

The company has just announced a joint venture with Giampaolo Group, one of North America's largest secondary aluminium operators, with the capacity to produce 900,000 metric tons a year of recycled metal.

But its Australian operations are going to remain a significant brake on the company's journey towards a lower carbon future.

Rio views the business as "critical" to its wider portfolio, according to Peter Cunningham, the company's chief financial officer.

It is also critical to Australia, not just because of its size but because, as Stausholm pointed out, it is "a business that can underwrite a lot of renewable energy".

"But if we can't get firm renewable energy at a competitive price, it's going to be impossible for us to manufacture and export aluminium out of Australia," he warned.

Rio's predicament neatly encapsulates the power paradox facing aluminium producers everywhere. Going green needs green energy, and there's not enough of it around right now.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Jan Harvey)