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Quebec is home to eight of Canada’s nine aluminum plants.CHRISTINNE MUSCHI/Reuters

Rio Tinto RIO-N chief executive officer Jakob Stausholm last month had a downbeat message for the mining giant’s Canadian aluminum operations with prices for the lightweight metal plummeting by almost half since briefly hitting a record high earlier this year.

“It is actually very difficult to have a profitable aluminum industry in North America at this time because Russian aluminum is flowing in,” Mr. Stausholm told Bloomberg News. “Right now we have the lowest aluminum price this year and you would have thought the Russia-Ukraine crisis would have led to higher prices in aluminum.”

You read that right. While Russia’s invasion of Ukraine has led Western countries to impose unprecedented sanctions on large swaths of the Russian economy, aluminum exports have been untouched by such measures. That has weighed on prices.

The situation could change, as the London Metal Exchange considers banning trading in Russian aluminum and U.S. President Joe Biden weighs blocking Russian aluminum imports. But for now, Russia’s ability to sell its aluminum in Europe and North America is a big reason prices for the metal have sunken like a stone in recent months.

After hitting a record US$4,073 a tonne in the aftermath of Russia’s Feb. 24 invasion of Ukraine, aluminum closed Tuesday on the LME at US$2,222. Prior to 2021, aluminum had been in the dumps for years, as surging Chinese production acted as an effective ceiling on prices.

Nowhere in Canada is the price of aluminum as closely monitored as in Quebec, which is home to eight of the country’s nine aluminum plants (the ninth is in northern British Columbia) and where aluminum producers have benefited from cut-rate electricity prices for decades.

Under risk-sharing contracts with the Quebec government, smelters wholly-owned by Rio Tinto and Alcoa AA-N, as well as the Alouette smelter that is 40-per-cent-owned by Rio Tinto, pay an electricity rate based on the market price of aluminum. When aluminum prices are low, the smelters get a break on power from Hydro-Québec. When metals prices are high, they pay more, though they still pay much less than they would almost anywhere else in North America.

The formula has resulted in billions of dollars in subsidies for the aluminum industry since it was first implemented in 1987 as Quebec moved to attract big industrial investments in the Saguenay-Lac-Saint-Jean region and on the province’s remote North Shore of the St. Lawrence River.

Back then, Quebec suffered from chronic unemployment and cheap electricity was used as a lever to provide desperately needed jobs in remote regions of the province. But with Quebec now facing a severe labour shortage and an end to its current electricity surpluses by 2026, the case for subsidizing the aluminum industry has become a lot harder to make.

Premier François Legault’s Coalition Avenir Québec government appears committed to maintaining the 35-year-old policy, especially after the CAQ swept all five Saguenay-area ridings and the North Shore riding of Duplessis that is home to the Alouette smelter, in last month’s provincial election.

Economy Minister Pierre Fitzgibbon, who inherited responsibility for Hydro-Québec in a postelection cabinet shuffle, recently defended the policy. But the utility’s chief executive officer, Sophie Brochu, has advocated for stricter criteria in the allocation of power to big users of electricity.

The cost of subsidizing aluminum production in the province appears set to soar in coming years as Hydro-Québec is forced to procure new and more expensive sources of power to meet demand that is expected to rise by half by 2050. Some economists argue it makes more sense for Hydro-Québec to export as much power as possible the United States, where it can fetch a premium price, and use the windfall profits to fund public services and cut taxes in the province.

The debate is occurring against the backdrop of calls for a “decoupling” of Western economies from China and Russia, which dominate global aluminum production. Canada accounted for 10 per cent of the world’s aluminum output in 2000; its share has fallen to 4 per cent. China’s share of global production has soared to 58 per cent from 10 per cent two decades ago.

What’s more, Quebec’s industry is at the forefront of efforts to entirely decarbonize aluminum production under an Alcoa-Rio Tinto joint venture that has received funding from the provincial and federal governments. Most of China’s industry is likely to depend on coal-based electricity and more carbon-intensive production processes for decades to come.

But until markets start to put a premium on the greener aluminum produced in Quebec – a development the industry talks a lot about but has yet to happen – the province appears destined to provide ever-larger subsidies to Rio Tinto and Alcoa.