Bluff aluminium smelter could close taking power prices tumbling

Wednesday, 23 October 2019

Tiwai Point's New Zealand Aluminium Smelter [NZAS] is under threat of closure. NZAS chief executive Stew Hamilton explains why.

More than $2 billion has been wiped off the value of power companies in the wake of a review of the aluminium smelter in Bluff, which could be destined for closure.

The smelter directly employs about 900 Southlanders, but its possible closure could have ramifications well beyond the region by flooding the market with cheap electricity.

The smelter, which is now the subject of a 'strategic review', has enjoyed cheap power from the Manapouri hydro plant since 1971, and consumes about 13 per cent of the country's electricity supply according to the Electricity Authority.

That could be unleashed on to the market in the event of a closure, potentially putting the skids on power prices.

**READ MORE:

* We are all paying for Tiwai Point

* New Zealand aluminium industry committed to a low carbon future

* Tiwai Smelter deal signed between Meridian Energy and NZAS

* Speculation that Rio Tinto's Tiwai Point smelter for sale**

Independent electricity retailers contacted by Stuff were reluctant to discuss the possible implications for power prices, noting that threats to close the smelter had been made before.

But Meridian Energy shares were down more than 8 per cent in late afternoon trading on the NZX, slashing its value by almost $1.2b.

Contact, Mercury, Genesis and Trustpower were also hit hard, with their shares falling by between 3 per cent and 8 per cent, also knocking more than $1b off their combined values.

The smelter is owned by New Zealand Aluminium Smelters (NZAS), whose major shareholder is resources giant Rio Tinto.

NZAS chief executive Stew Hamilton said the strategic review was a serious step.

Responding to comments on social media that it had threatened to close the smelter every few years to get cheaper electricity prices, Hamilton said 'this is different'.

'This is quite serious, the financial position of the smelter is serious.

'It's the first time Rio Tinto has announced a strategic review for the site and that means they are actually going to formally go through the process of assessing all the options including curtailment and closure,' he said.

The Tiwai aluminium smelter in Bluff is again being threatened with closure.

It was 'hard to know' how likely closure was, but it was one of the options, he said.

'We have been losing money for some time and we need to make a fundamental improvement in the financial status of the smelter.'

Options ranged from operating at the status quo, which would require cheaper power, to closure of the plant, he said.

NZAS reported a $220m profit for the year to December, but Hamilton said the price of aluminium had dropped about 25 per cent since then.

'That means we are losing money and have been for the last 12 months, so the financial security of the smelter is difficult.

'We really need to be making something significant, so in the future we are viable for the long term.'

A fundamental reset in its power price was needed for it to be sustainable in the longer term, he said.

Energy Minister Megan Woods has quickly ruled out taxpayer help to keep the Bluff smelter open.

An update on the strategic review was likely in February or March, he said.

The price of aluminium is sitting at about US$1728 (NZ$2742) a ton, down from a peak of just over US$2500 a ton in April last year and back at levels seen towards the end 2017.

National Party leader Simon Bridges agreed there was 'always the possibility' the strategic review was a bluff designed to win concessions from the Government.

But he believed rising wholesale power prices and the Government's ban on new oil and gas exploration, as well as its failure to secure an exemption from United States' tariffs on steel and aluminium, would not have helped.

Deputy Prime Minister Winston Peters said he did not know if the smelter would close, saying there had been 'countless' talks in the past.

The smelter's business model was to 'turn water into money by aluminium', he said.

'I think that is still a great idea.'

He appeared to leave the door open to moves to encourage the smelter to remain open, making the case for 'looking at this with fresh eyes'.

Prime Minister Jacinda Ardern at the official re-opening of Potline 4 at Tiwai Point Aluminium smelter in 2018.

'I think everyone would agree the Government does have a role in ensuring the heaviest exporting province in the country gets a fair go,' he said.

Earlier, Energy Minister Megan Woods said the review was a commercial process by a commercial operator.

'We hope that these discussions and work by NZAS and Rio Tinto result in the smelter remaining open and continuing to back the Southland economy by trading on its position as producing the world's greenest, low-carbon aluminium,' she said

'The New Zealand Government has had a clear position since 2013 under the Key/English government that there will be no more financial assistance from taxpayers for Rio Tinto, which is already supported by Meridian for the power it uses.'

That hadn't changed, she said.

'We note Rio Tinto's own assessment is that the fundamentals for the aluminium market are still strong, and should see a return to higher prices over the medium term.'

Rio Tinto Aluminium chief executive Alf Barrios said in a statement that it intended to hold discussions with the Government and energy providers to explore options and identify economically viable solutions.

The smelter has enjoyed cheap power from the Manapouri hydro plant since 1971.

'The aluminium industry is currently facing significant headwinds with historically low prices due to an over-supplied market. This means that many aluminium providers are reviewing their positions.

'Rio Tinto will work with all stakeholders including the government, suppliers, communities and employees in order to find a solution that will ensure a profitable future for this plant,' he said.

Hamilton said NZAS had paid nearly $200m over the past 10 years for transmission infrastructure it does not use in the North Island.

The reaction from staff was one of uncertainty, and they were unsure what the future held, he said.

NZAS chief executive Stewart Hamilton makes the case for intervention to save the aluminium smelter in October.

Hamilton said Southlanders were supportive of the smelter and NZAS was proud of it.

'It's the highest purity, lowest carbon smelter in Australasia and the world … we want to be here longer term.'

Invercargill National MP Sarah Dowie said the review was devastating.

'They wouldn't make this announcement unless they were seriously and critically looking at their operations.'

The announcement came on the back of the Southern Institute of Technology being centralised and uncertainty in the farming sector, she said.

'Now Rio Tinto; Southland will be destroyed,' Dowie said.

'Why would New Zealand be in the business of exporting jobs and livelihoods at the expense of exporting the greenest aluminium in the world. It makes no sense – we should be doing everything we can to make it possible for the smelter to thrive.'

Rio Tinto's statement said it spent about $450m in New Zealand annually and accounted for 6.5 per cent of Southland's GDP with export revenues of about $1b each year.

It said the strategic review would examine the economic and social impacts of the loss of NZAS to Southland and New Zealand.

Southland Chamber of Commerce president Neil McAra said closure of the aluminium smelter in Bluff would be devastating for the Southland economy.

The Southland economy was reliant on the smelter, along with agriculture, he said.

McAra said the Government had talked about supporting regional New Zealand but he did not believe it had lived up to that.

Like Dowie, McAra pointed to the SIT situation and Tiwai as examples where he felt there could be more support from the Government.

He described the transmission situation as unfair, given Tiwai paid nearly $200m over the past 10 years which went to transmission infrastructure in the North Island.

'It's a case of robbing Peter to pay Paul,' he said.

McAra said leaders within the Southland community were gathering on Wednesday to talk through the situation.

Southland E Tu union organiser Trevor Hobbs, who represents unionised workers at the smelter, said he sympathised with the workers.

Everyone knew Rio Tinto repeatedly complained about its electricity transmission costs and played extremely hard in negotiations - the threat closure had been raised more than once, he said.

Hobbs said anyone in business would do the same thing, given Tiwai was paying for electricity transmission investments across the country which it received no benefit from.

But this resulted in the workers not knowing from month to month and year to year whether they would still have a job.

'It's not a good environment where your livelihood, your source of income, may be cut off.

'You have to sympathise with people in that position.'

If the smelter closed it would have a huge flow-on effect for Southland, Hobbs said.

He believed house prices would drop and smelter staff would leave Southland to find work elsewhere, taking their families with them, which would impact on schools and other aspects of the community.

'The impact of closing the smelter would be huge and no-one in Southland would want to go down that path.'

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