Smelter ‘very profitable’ now
The Tiwai Point aluminium smelter will now be very profitable and it is ‘‘entirely possible’’ its owners will seek to keep it open beyond the end of 2024, Meridian Energy chief executive Neal Barclay says.
Meridian and the smelter’s majority owner, Rio Tinto, announced last week that they had agreed a new electricity contract that would mean the smelter will stay open for almost another four years.
Broker Forsyth Barr believes the smelter negotiated about a 36 per cent reduction on the power component of its electricity bill, cutting the price it pays for electricity to about 3.5 cents per kilowatt hour and shaving about $100 million off its annual costs.
Forsyth Barr forecast Rio Tinto would knock on Meridian’s door again next year, or the year after, seeking to renew the contract for longer.
Barclay agreed it was ‘‘entirely possible’’ the smelter would approach Meridian ‘‘and want to extend’’.
‘‘They are more than likely to want to engage at some point, particularly if aluminium prices hold up the way they are – it is a very profitable smelter now,’’ he said. ‘‘If we were to engage in, or entertain, such a thought it would be because that was our ... best option,’’ he said.
But Barclay said the new price at which Meridian had agreed to supply the smelter was ‘‘not sustainable’’ and indicated he was optimistic Meridian could find higher-paying customers for its power in the interim.
The smelter had no automatic right to buy electricity from Meridian beyond 2024, he made clear. A spokeswoman for Rio Tinto declined to comment to Stuff on whether it was likely to seek to extend the power contract down the track and give the smelter a further reprieve.
Barclay said that after Rio Tinto indicated it would close the smelter in August this year with the loss of 1000 jobs, Meridian put a firm offer to it on July 17 offering a ‘‘significant price discount’’.
The price reflected the fact that ‘‘if the smelter closed in August 2021 then transmission constraints and transmission losses would lead to higher levels of spill and lower generation revenues for
Meridian for a few years’’, he said.
Meridian did not drop its price again. But in December it offered the smelter the option of reducing the amount of power it bought from 572MW to 400MW with six months’ notice, in case it wanted to reduce production earlier, he said. It also extended the end-date for the contract from August 2024 to December that year.
Meridian chief financial officer Mike Roan said that based on current aluminium prices and exchange rates, the new power price would mean the smelter was likely to be profitable for the next four years, according to Meridian’s modelling.
The option for the smelter to reduce the amount of power it bought gave Rio Tinto ‘‘some downside protection’’ should aluminium prices come down again, he said.
Meridian’s comments about the profitability of the smelter – and the July timing of the pricing element of its offer – may raise questions over whether and why the Government might still be prepared to offer the smelter a separate discount on the transmission charges it pays to Transpower.
Energy Minister Megan Woods said last week that the Government was independently still in talks with Rio Tinto about those charges – and also about the smelter’s responsibilities to clean up the smelter site when it closes.