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Aluminium is essential to advanced manufacturing (Christopher Pike/Bloomberg via Getty Images)
Comparative advantage can’t explain why Australia’s largest aluminium smelter is worth saving – geoeconomics can.
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The economics of economic securityThe economics of economic security
The Albanese government has announced a support package of $2.5 billion (Opens in new window) for the Tomago aluminium smelting operation, framing the action as securing sovereign capability. Tomago is Australia’s largest aluminium smelter. It has nameplate production of about 590,000 tonnes a year (Opens in new window) – 37% of national primary output – and roughly 1,000 direct employees.
Critics describe the support as a “bailout” (Opens in new window) that comes “at the expense of the nation’s overall international competitiveness”. (Opens in new window) This critique draws on the standard model of comparative advantage: if Tomago’s long-run cost, particularly electricity and firming, exceeds the world benchmark price, an ongoing subsidy locks labour, capital and electricity into an activity whose private output is worth less than its resource cost. Letting the smelter close would therefore save public expenditure and shift resources towards areas of stronger comparative advantage.
Yet this conclusion holds two questionable assumptions in the current geoeconomic world (Opens in new window) economy. The first assumption is that world prices reflect underlying costs. The second assumption is that price guarantees access to internationally sourced goods.
The Tomago package holds a long-term economic-security insurance value that its private balance sheet cannot capture.
The international aluminium market reflects genuine cost advantages, including access to bauxite, cheap power, scale, technology and proximity to customers. But its prices also reflect (Opens in new window) subsidised electricity, concessional finance, tax concessions, state ownership and capacity-preservation policies. These interventions have radically reshaped where aluminium is produced, undermining assumption one. In 2024, China supplied nearly 60% of approximately 73 million tonnes of global primary aluminium output, up from 24% in 2005. Over the same period, OECD members’ share fell from 38% to 12%, while Gulf Cooperation Council countries increased their share from effectively zero to 9%.
The OECD’s MAGIC database (Opens in new window) finds that China-based aluminium firms were by far the sector’s largest subsidy recipients between 2010 and 2024. Yet MAGIC excludes the direct provision of subsidised energy, even though electricity is one of the largest costs in primary smelting. China’s energy subsidies would therefore add additional financial advantages. As a result, the geography of global production cannot be treated as a revelation of comparative advantage: it reflects conventional industrial scale advantages, but also government decisions to financially support targeted industrial capabilities, undermining private firms that do not receive similar public support.
Assumption two, that access to international output such as aluminium is guaranteed by price, making the location of production is irrelevant – is a dangerous liability at a time where governments disrupt supply of strategic goods (Opens in new window) for non-economic reasons. Customers can be left empty handed (Opens in new window) no matter what price they are willing to pay.
Primary aluminium is a general-purpose input rather than a niche defence mineral. It is essential to advanced manufacturing, including electricity conductors and grid equipment, transport, aircraft, naval vessels, construction, packaging, machinery and the energy transition. For this reason the United States included aluminium (Opens in new window) on its 2025 Critical Minerals List, while the European Union’s Critical Raw Materials Act lists bauxite/alumina/aluminium (Opens in new window) among strategic raw materials, and its metals action plan links aluminium directly to defence and resilient supply.
The 2026 Australia-Japan Joint Declaration on Economic Security Cooperation (Opens in new window) states, “We recognise the strategic value of retaining domestic smelting and metal processing capacity to our economies, industrial resilience…[and] collective economic security”. Australia is the largest supplier of unalloyed aluminium to Japan (Opens in new window), providing around 30% of its imports in 2024. Japan has no domestic primary aluminium smelting operations, making Australian imports a key source of secure supply, as the joint declaration recognises. This demonstrates the broader economic security value of Australian base metal production.
More broadly, the Tomago case illustrates a classic collective-action problem that has hollowed out advanced economy industrial capacity since China joined the WTO in 2001. Every economy individually benefits from inexpensive aluminium, or other strategic materials produced under foreign subsidies. If each permits its own supposedly marginal capacity to close, trusted partners lose resilience while rival nations accumulate market share, relative increases in industrial capacity and economic power.
Furthermore, industrial activities are interrelated, where waste from one activity is the feedstock for another. For example, the critical mineral gallium cannot be produced without bauxite refining (Opens in new window), during which it accumulates in the caustic liquor by-product. If like-minded countries lose aluminium capacity, they also lose gallium capability. Much like the game of Jenga, removal of each industrial capacity may seem individually unimportant, collectively it leads to an eventual collapse in economic resilience.
The case for supporting Tomago is therefore stronger than the simple language of comparative advantage suggests. A distorted world market where concentrated control over critical supply chains is readily weaponised requires a broader calculus than economic efficiency when deciding on market intervention. The Tomago package holds a long-term economic-security insurance value that its private balance sheet cannot capture. If Australia and partner countries are truly serious about rebuilding a baseline of industrial capacity, securing foundational industries is a good starting point.
About the author
Naoise McDonagh
Dr Naoise McDonagh is MBA Director and Senior Lecturer in geopolitics and international trade in the School of Business and Law at Edith Cowan University.
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