Talks intensify for deal to 'save' aluminium smelter as minister says she's not intervening

Tuesday, 3 March 2020

Rio Tinto expects to make a decision on the future of the Tiwai aluminium smelter by the end of the month.

Energy Minister Megan Woods has denied intervening to help the Tiwai Point aluminium smelter get a better deal on its power costs, despite offering the smelter's majority owner, Rio Tinto, assistance from her officials at meetings with national grid operator Transpower.

Rio Tinto is due to make a decision by the end of the month on whether to partially or fully close the smelter, which employs 805 staff.

The Electricity Authority last month began consulting on an important rule change that could allow the smelter's operator, NZAS, to get a 'prudent discount' on the $64 million annual fee it currently pays Transpower to carry electricity to the smelter from the Manapouri power station.

Woods earlier emailed the chief executive of Rio Tinto's aluminium business, Alf Barrios, saying such a discount was the only 'feasible solution'.

**READ MORE:

NZ First List MP Mark Patterson launched a petition in Mataura for the ouvea premix, which is housed in the unused Mataura papermill buildings, to be removed and taken back to it's origin at the Tiwai Point Aluminium Smelter.

* Path cleared for aluminium smelter to get discount on $64m annual Transpower bill

* Rio Tinto says 'nonsense' in electricity code a barrier to saving Tiwai Point smelter

* 'Surplus' power from smelter could be freed-up for South Island in 2022**

Energy Minister Megan Woods said she had made it 'crystal clear' in several meetings with New Zealand Aluminium Smelter that she would not be intervening on its behalf, but did tell Rio Tinto that 'her officials' could assist in meetings with Transpower.

She suggested an early approach to Transpower if Rio Tinto wanted to seek a discount, and said in the email that 'my officials will be available, if needed, to assist in any meetings on this matter'.

Despite that offer of assistance, Woods told Stuff on Monday that she had 'repeatedly made it crystal clear to NZAS in several meetings that I will not be intervening on their behalf and the right course of action is to speak to the relevant authorities who are the decision makers'.

Public submissions on the Electricity Authority's proposed rule change only closed on Tuesday, but Transpower spokeswoman Deb Gray said it had some discussions with representatives of Rio Tinto and the Tiwai smelter about what the change might mean before that.

Transpower was party to a workshop on Thursday with representatives of Rio Tinto and the smelter, the Ministry of Business, Innovation and Employment, the Electricity Authority, the Commerce Commission, Treasury and various other senior industry participants, she said.

'The proposed prudent discount policy was discussed along with a range of other potential initiatives that would reduce the smelter's overall energy cost,' she said.

Getting a discount on its electricity transmission costs has been one of the smelter's key objectives.

In addition to a transmission discount, NZAS chief executive Stewart Hamilton told the Electricity Authority in December that it was seeking about a one-third reduction in the price it pays for electricity, which is currently believed to be about 5 cents a kilowatt-hour.

The rule change proposed by the Electricity Authority would allow power users such as smelter to cap their transmission bill at the price they would need to pay to have their businesses connected to power stations using their own dedicated transmission lines.

Aluminium futures have fallen in the wake of the coronavirus, with reports of inventory building up in China.

That would remove a key obstacle that means the smelter would currently need to prove to Transpower not only that it would be cheaper in theory for it to build its own power lines to the smelter, but also that it had a viable business plan to do that.

Rio Tinto's Australian-based energy director Lesley Silverwood told the authority in December 'there is no way on earth we could get permission to build a duplicate line through to Manapouri so that is just a nonsense'.

Asked whether Transpower felt under any pressure from Woods to offer the smelter a discount, Gray said it had received 'no indication or specific direction from any minister in relation to the smelter' or transmission pricing.

'The valuation process for assessing the 'efficient standalone cost' under the proposed new prudent discount policy would be complex and open to multiple interpretations,' she said.

'We have not yet engaged with the smelter on its estimate of the standalone cost and the extent to which it may vary from Transpower's estimate.

'We are attempting to schedule a workshop to discuss such matters and are asking the regulators to facilitate.'

Gray said that it had advised the Electricity Authority that if the prudent discount policy change was made, then the authority, and not Transpower, should be the final arbiter of whether it could be applied 'and to what amount'.

New Zealand Aluminium Smelter posted a loss of $356 million in the year to December, following a profit of $220m the previous year.

However, its results fluctuate wildly as a result of the way it accounts for its electricity supply contracts.

Rio Tinto has said a more meaningful measure of the smelter's performance is provided by its Pacific Aluminium subsidiary, which reported an 'underlying loss' of $46m, following a $22m profit in 2018.

The smelter reported a positive cash flow from operations of $16m last year, down from $30m the year prior.

Treasury officials cast doubt on the significance of company's reported results last year.

Officials advised the Government that because the smelter sourced the alumina it smelted from mines that are owned by Rio Tinto in Australia it had 'the ability to engage in transfer pricing to shift value from NZAS to Rio Tinto, and ensure that the NZAS operation yields low to no profits'.

Rio Tinto rejected that assertion saying there was 'no profit shifting'.

'Rio Tinto sells alumina into its NZAS interest at market rates, which is consistent with what Rio Tinto's unrelated customers pay for the same or similar alumina at arm's length,' a spokeswoman said.

'Moreover, the pricing of Rio Tinto's related-party aluminium sales from NZAS is arm's length in accordance with [an] agreement reached between Inland Revenue and Rio Tinto.'

While work continues on a possible deal to give the smelter a break on its electricity prices, the outlook for aluminium pricing has worsened as a result of the coronavirus.

Reuters reported that the virus 'could not have come at a worse time' for the aluminium market, after global aluminium demand fell last year for the first time since the global financial crisis.

'The fear is that China's aluminium smelters will keep churning out metal even as the country's demand implodes,' it reported late last month.