Rio’s power play A $30m shakedown
Once again, the Tiwai Point aluminium smelter wants government support. Fear of a shutdown has worked before, but it may not work this time, writes Hamish Rutherford
When Rio Tinto was handed a $30 million cheque courtesy of the New Zealand taxpayer in 2013, the National Government of the day was clear: don’t come back asking for more. “They certainly wouldn’t get a second bite of the cherry from this Government,” Finance Minister Bill English told reporters the day the deal was announced.
But according to several people, the global mining giant, which owns the majority stake in the Tiwai Point aluminium smelter, returned to the Beehive about two years later, seeking more concessions.
This time the smelter wanted relief from transmission pricing, where the company (with considerable sympathy from industry) claims a pricing structure forces it to pay a hefty share of upgrades that provide it with no benefit.
The conversations were short: Rio Tinto was told to give up trying. Ministers are said to have passed on their disappointment that the company had not got the message last time.
In a statement, Rio Tinto neither confirmed nor denied that it had sought further Government intervention from National.
“As a business which has paid nearly $656 million in transmission costs over the past decade, we are always talking to successive governments about transmission costs and we continue to do so.” People who have been involved in previous lobbying efforts agree.
“They keep at it, generally,” said one person involved in earlier rounds of approaches.
“There’s probably been an unusually long break” between the previous approach to the Beehive and the latest one.
The recent announcement from Rio Tinto that it was conducting a strategic review of its New Zealand operations — including the possibility of closure — drew immediate comparisons with the settlement struck by National.
Although that deal sparked accusations of direct corporate welfare, the smelter’s owners had an unusual amount of leverage at the time, leaving National in a difficult position: either do a deal and face those accusations, or risk the collapse of one of its most high-profile policies — state asset sales. National was attempting to raise at least $5 billion from the partial privatisations of state-owned energy companies Genesis, Mighty River Power (now Mercury) and Meridian through listing them on the sharemarket.
Early in the process Labour and the Greens had launched NZ Power, a proposed reform of the electricity sector that would have sharply reduced the profitability of many of New Zealand’s power plants.
The policy resulted in analysts slashing their forecasts for how much the flotations would raise because of the political uncertainty hanging over the sector.
Meanwhile, the smelter — New Zealand’s largest electricity user — was in protracted talks with Meridian over pricing and directly urging the Government to become involved.
Although the threat of losing jobs in Southland became the public focus of the talks, it was not the reason Cabinet agreed to a “one-off incentive payment”.
The smelter’s owners agreed to the terms under which it would continue to
Stew Hamilton, pictured with Prime Minister Jacinda Ardern (also top left), says Rio Tinto’s strategic review shows the situation is “more serious” than during previous talks with the Government. operate the plant until at least 2017.
But there was nothing in the agreement about securing any jobs. If the deal was about providing clarity to investors, how would those investors account for the price of guaranteed jobs?
Vigorous lobbying
Rio Tinto’s approach to extracting a settlement from the Government this year has been far more aggressive than in the past.
The negotiations that led to the 2013 payout stayed secret for months.
This time, about a year after Prime Minister Jacinda Ardern attended a ceremony to mark an expansion of the smelter, the company has been highly public about the scale of its demands.
Stew Hamilton, chief executive of New Zealand Aluminium Smelters (NZAS), said last month that the fact that Rio Tinto had called a strategic review meant the situation was “more serious” than during previous talks with the Government. “There’s no doubt that part of the process is to go about how we could get a reset of our power and energy costs,” Hamilton said.
Although the company has not been precise about what it would take to keep the smelter open, Hamilton has claimed that it is losing millions of dollars a month and would need “tens of millions” in annual relief in both electricity and transmission costs.
As he fended off questions about whether the company was simply bluffing, Hamilton told the Southland Times that a “closure squad” would arrive at the plant as part of the strategic review.
But so far, the Government appears to be prepared to stare the company down.
Little more than an hour after news broke of the strategic review, Energy Minister Megan Woods said the position of the New Zealand Government since 2013 had been that there would be no more taxpayer funding.
“This hasn’t changed.”
Woods has further indicated that despite Rio Tinto warning that it expects to complete its strategic review early next year, the Government will allow a review of transmission pricing, expected to roll into at least mid-2020, to “play out”.
The giant who cried ‘wolf ’?
As well as its reputation for seeking assistance again and again, Rio Tinto’s position is undermined by the fact that it is very hard to understand the profitability of the smelter. This means it is difficult to assess the company’s claims.
Treasury has warned ministers not to rely on media commentary on its financial performance. The way the smelter is structured means it never takes ownership of the aluminium it produces, acting as a tolling operation for its owners.
Financial statements filed by NZAS show sharp swings in profitability, with an after-tax profit of more than $220m in 2018, following a loss of $175.5m in 2017.
The figures reflect movements in the value of financial products linked to its contract with Meridian Energy, its supplier of electricity, rather than its performance.
And although NZAS claims it is losing millions, others cast doubt on this.
On the day the strategic review was announced, Meridian’s chief financial officer Mike Roan told investors that it believed the smelter would generate positive cashflow in 2019.
“We don’t see it as being a large, free cashflow position for them but we do see it as being positive, on a standalone basis,” Roan said.
There is support for that position from the analyst community.
Forsyth Barr energy analyst Andrew Harvey-Green questions the depth of the difficulties faced by Rio Tinto.
Although the mining giant has claimed aluminium prices had fallen 25 per cent in
There’s no doubt that part of the process is to go about how we could get a reset of our power and energy costs. Stew Hamilton, NZ Aluminium Smelters
a year, Harvey-Green said that calculation was based on a price the metal reached “for less than a week”.
He puts the price drop at closer to
15 per cent, adding that the smelter’s cash profitability is believed to be better than it was both a year ago, when the smelter expanded, and in 2012-13, at the time of the cash payment from the taxpayer.
Harvey-Green says it is “a case of crying ‘wolf ’,” and puts the odds of the smelter closing at less than 10 per cent.
John Kidd, an energy analyst at Enerlytica, also predicts that Tiwai has been cashflow positive in recent months. The market for aluminium deteriorated sharply in 2018, but the conditions the smelter had been talking about recently were “almost out of date”.
“I think Tiwai have been a little bit selective with what they’ve been communicating to the market around profitability.”
Rio Tinto said it would not comment on other parties’ forecasts about the smelter’s position. “Our own planning is forecasting a cash loss over 2019.”
Kidd said an upcoming round of capital expenditure, which Rio Tinto said could cost about $65m, meant its owners were likely to be looking short-term when thinking about whether it would generate a return.
Kerry McDonald, a director who ran Tiwai Point for about 15 years until
2003, said smelters around the world tend to become less economic over time.
The owners would be looking closely at upcoming spending needs.
“The company would have a pretty clear view of its options and even back in my day, we thought carefully over a period of one to two decades about what we would be prepared to invest, given different lifespans.”
McDonald, who before working at the smelter provided economic analysis of it in his role as an economist at the NZIER, disputed the claim that the smelter receives subsidised electricity.
“When I was with Comalco, our power payment, annually, was almost exactly the current cost [at the time] to the Crown, of the Manapouri power scheme.”
The smelter’s economic contribution was significant over its lifespan and McDonald said he suspected it was still significant. But that did not mean the Government owed the smelter anything. “What New Zealand owes the smelter is an obligation to adhere to the legal arrangements, within that framework. I don’t think there’s any wider or greater obligation. I expect both parties to act within the framework of the agreements, in their own best interests and try to get the best outcome.”