ORAM Time to get real on smelter
Continuing to subsidise Tiwai Pt would be a mistake.
THE TIWAI Pt aluminium smelter has no future. We can deal with its demise in an orderly and economically positive way over the next few years; or chaotically and damagingly later.
It shares its fate with scores of other old smelters around the world. They were built 30-40 years ago to exploit very cheap electricity in remote places. But big changes in technology, electricity markets and the aluminium industry in the past decade have destroyed their economic lives.
It is yet another example of China quickly dominating an industry and leaving its competitors in the dust. A decade ago China was only a mid-sized player and its technology was a joke.
But since 2000, it has increased its smelting capacity six-fold to 18 million tonnes a year, 40 per cent of world output. It plans to add another 10 million tonnes over the next three to four years by building huge smelters and power plants in its remote far west. It has abundant reserves of bauxite, the principal ore for aluminium, and is already the world’s second-largest producer of bauxite after Australia.
It has also become the technology leader in smelting. One New Zealand industry expert reckons the best Chinese plant is at least twice as energy efficient as Tiwai Pt, and enjoys cheaper electricity.
China has rocked the global aluminium industry. Its prodigious expansion has ensured aluminium has missed out on the heady boom of other metals and minerals.
At around US$2000 ($2440) a tonne currently, its price has changed little since 1980. It is by far the worst-performing mined commodity. In contrast, over the same period the price of copper has trebled and iron ore has increased eight fold, according to the IMF.
As a result, the stock market capitalisation of the five largest listed aluminium producers has fallen by two-thirds to US$65 billion and profits by 75 per cent over the past five years.
Rio Tinto, which owns 79 per cent of the Tiwai Pt smelter, is a big loser thanks to an astonishingly bad deal it inked in 2007. It lost its head in a bidding war for Alcan, the Canadian-based smelter, paying US$38b, a 65 per cent premium over the market price.
Financed almost entirely by debt, it was the biggest takeover ever in the mining sector and the burden has dragged Rio down ever since. The assets are performing so poorly that some 80 per cent of Rio’s profits come instead from iron ore.
Given the poor medium-term outlook for the aluminium industry and its own disastrous performance, Rio is having to take brutal action. It’s investing in its best smelters, shutting its worst, and has bundled A$8b ($10b) of the assets in between into a new entity, Pacific Aluminium, which it has put up for sale.
Tiwai Pt, one of the assets for sale, was once a jewel of its kind, exploiting since 1971 very cheap, captive electricity. The government of the day built the Manapouri hydro scheme to supply the smelter, which has only ever paid a fraction of the price for electricity that other industrial users pay.
But Rio says it must have even cheaper electricity to restore Tiwai’s viability. The company said the same about its Bell Bay smelter in Tasmania. In June it persuaded Hydro Tasmania, the state-owned generator, to sign a 13-year agreement on exceptionally favourable terms to keep the smelter open.
Rio is taking the same hardnosed approach in demanding a deep price cut from Meridian Energy, owner of Manapouri. But there’s one utterly crucial difference between the two generators. In a classic case of isolated capacity, Hydro Tasmania had no alterative customers. But Meridian can sell into the national grid, a little now and the rest later, if Transpower accelerates its upgrade of lower South Island lines.
So unlike Tasmania, New Zealand does have a choice: we could use the electricity to keep the smelter open. Or we could use the electricity to the greater benefit of the wider economy.
Rio argues the smelter generates significant economic value to the country. But that is highly debatable. It is easy to measure the local benefit of 800 smelter jobs plus more among contractors and in the wider Southland economy.
It is a lot harder, though, to measure the net benefit at a national level. For example, Rio and its supporters point to the smelter’s $1b of aluminium exports a year. But they ignore the cost of importing alumina, the smelter’s raw material, or dividends paid to Rio.
Adjusting for such items reduced the annual net exports to one-fifth that level from 2007-2010 in analysis last year by Sue Newberry, an associate professor of accounting in the University of Sydney’s Business School.
But the picture would be even worse if the analysis was broadened beyond Dr Newberry’s to consider the steep subsidies the smelter gets in terms of cheap electricity and free carbon credits in the Emissions Trading Scheme. A sharp cut in electricity price by Meridian to satisfy Rio would only make the economics worse.
There is, instead, a very good case that the electricity would create greater economic benefit if it were available to all users across the country. Manapouri, which has by far the most reliable water storage of all our hydro schemes, generates just the sort of electricity we need: renewable base-load.
If the smelter closed, Manapouri would meet increases in electricity demand for years to come. But if we had to build the equivalent of its 800MW of capacity, the bill could be $4.5b, judging by the $466m Mighty River Power is spending on its 82MW Ngatamariki geothermal project due for completion next year.
So, it’s time for Rio and Meridian, Southland and New Zealand to face up to the harsh reality of Tiwai Pt. The plant is no longer economically viable and, at a mere 0.8 per cent of world aluminium output, it is irrelevant to the global industry. Subsidising it further would be a very serious economic mistake.
However, sudden closure of the smelter would only increase the cost and pain of transition to new economic activity for all parties.
Logically, three big things need to happen over the next five years: Meridian and Rio must agree an electricity pricing formula that would enable an orderly phaseout of the smelter; generators and the Government must work on helping the electricity market absorb Manapouri’s capacity; and Southland and the Government must co-operate on the region’s economic development.