Time coming to kiss smelter goodbye
Let’s get one thing straight. The Tiwai Point aluminium smelter barely registers on the radar at Rio Tinto. To suggest that anyone at the head office of the Canadianlisted, Anglo-Australian global metals behemoth is losing sleep over a few thousand jobs in Southland is fanciful.
They’ve seen an opportunity to create leverage in their price negotiations by exploiting the government’s asset sales programme.
But in the end, they want to quit this and other Australiasian smelters that sit well above the lowcost smelting it can achieve in Canada, where it’s investing heavily. Ironically, since Tiwai Pt consumes about 15 per cent of total electricity produced in New Zealand’s hydro-heavy system, Rio is trumpeting the benefits of lowcost Canadian hydro-electricity.
A UBS research report issued in November 2011, just after Rio put its New Zealand and Australian smelters up for sale as Pacific Aluminium, suggests Tiwai Pt makes metal at around US$1900 per tonne, against US$1700 at Tomago – the lowest cost of the Australian smelters being sold – and US$1400 in Canada.
Since 2007, when Meridian Energy and Rio inked the now disputed contract for up to 18 years’ electricity supply to Tiwai Point from 2013, the price of aluminium has tanked. It was above US$3000 per tonne that year, plunged to below US$1300 a tonne in 2009, and is close to US$1900 a tonne today.
No wonder smelter staff have been told Tiwai Point has lost money of late.
More to the point, that 2007 signing coincided with Rio’s disastrous US$38 billion purchase of Canadian aluminium producer Alcan. Analysts estimate impairments have destroyed between US$20 billion and US$25 billion of that value. Rio is now seeking to stave off a credit rating downgrade.
The Alcan blunder was one factor that cost long-time Rio chief executive Tom Albanese his job earlier this year. His replacement, Sam Walsh, will have no interest in anything but ‘‘disposal or closure of non-core assets’’ as one of his primary goals.
His only question will be whether the Tiwai Pt smelter is worth more open than closed. In the absence of buyers, closure grows as an option, despite hundreds of millions of dollars of site remediation costs that a closure would trigger.
In other words, no matter how hard Meridian Energy tries to do a new deal with the smelter, it’s time to get ready to kiss it goodbye. After 42 years, it’s served New Zealand well enough, raking in billions of dollars in foreign exchange earnings, paying a lot of tax in its many profitable years, and creating high-paying jobs in one of our more remote regional economies.
But the aluminium industry is changing. Lower cost, larger scale plant is being built, especially in China, and the integrated ‘‘miningto-metal’’ business model is looking outdated.
Using cheap New Zealand electricity to turn Australian bauxite into high-grade metal is not the money-spinner it once was, all the more so because New Zealand itself can probably use the energy from Manapouri for higher-value activities. Meridian, for example, expects to be more profitable if the smelter closes because it will be free to market its excess power to higherpaying customers.
The exact price of power to the smelter is secret. However, enough is on the record to suggest it pays close to $50 per megawatt hour.
That’s about $15 per MWh below recently depressed levels on the wholesale electricity spot market and well out of the money for longer term contracts, where suppliers will seek $80 per MWh-plus. Rio, on the other hand, would like to keep its ‘‘discount for bulk’’ deal at below $50 per MWh well into the 2020s. It’s not going to happen. And as to the supposed pressure on the MightyRiverPower float?
Even nine years ago, when the smelter was still owned by Comalco, the company was saying if smelter power was ‘‘freed up at Lake Manapouri, a reduction in coal-fired generation at Huntly would remove any benefit of extra power from the national grid.’’
That logic is even stronger today. Genesis Energy is desperate to be rid of Huntly, while Contact Energy talks openly of closing one or both the company’s combined cycle gas generation plants at Otahuhu and Stratford. Transpower says it could upgrade the national grid to get smelter load out of Southland ‘‘in three summers’’.
In other words, Rio has pushed Meridian and the government as hard as it can. It has contractual obligations that would see an orderly closure over the next fiveand-a-half years. That would be a blow, but not an unmanageable one for Southland or New Zealand.
Rio now knows that’s the final position. Its bluff at Bluff, just as much as the government’s, has now been called.