Sudden closure of aluminium smelter worst outcome for jobs, consumers and the environment

Thursday, 9 July 2020

Invercargill Mayor Sir Tim Shadbolt talks about the closure of the Tiwai Point aluminium smelter.

OPINION Rio Tinto’s announcement that it will “wind down” producing aluminium at the Tiwai Point smelter by August next year represents a failure of negotiation, when a compromise seemed possible.

Despite its timing – just nine weeks out from the September election – there is scant evidence Rio Tinto is playing a game of chicken, and if it is, no-one seems to be blinking.

Rio Tinto Aluminium chief executive Alf Barrios indicated it could have come to a different decision had it been able to reach “a solution to secure a power price reduction” to make the smelter financially viable.

But only Contact Energy boss Mike Fuge seems to hold out hope of Rio Tinto changing its mind on the smelter, calling on the company to “reconsider” while simultaneously blasting it for “limited engagement”.

* Vector says if smelter gets Transpower discount then it may ask for one too

For Southland aluminium has been more precious than gold.

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

Prior to the Covid-19 pandemic, it appeared the majority of Kiwis were more than happy to call Rio Tinto’s bluff.

But with the country heading into recession and unemployment expected to climb towards 9 per cent, the 1000 jobs the smelter provides for staff and contractors now look far harder to replace.

Another 1000 manufacturing jobs are hanging in the balance at the other end of the country in Northland, as Refining NZ considers the future of the Marsden Point oil refinery.

More could be in the frame if NZ Steel’s warnings about the Glenbrook steel mill being at risk prove well-founded.

There appears a chance New Zealand’s heavy industrial sector is about to be completely gutted.

Tiwai’s sudden closure would probably also be bad on balance for the environment.

Greenpeace executive director Russel Norman takes heart from the fact that it would “release a huge amount of low-carbon and affordable power back onto the grid”.

But that is likely to be at the cost of fossil fuels being used to produce more of the world’s aluminium.

Finance Minister Grant Robertson speaks on the Tiwai Point smelter closure, which will result in the loss of thousands of jobs.

Energy Minister Megan Woods herself states: “It is disappointing that Rio Tinto is deciding to close one of the world’s lowest carbon aluminium smelters, in favour of keeping open coal plants”.

Yes, it may help New Zealand move closer towards 100 per cent renewable generation, but when it comes to climate change, it is total emissions – not just the ones New Zealand produces – that matter.

Woods is talking up the benefits that may flow to Kiwis from cheaper electricity once generation from the Manapouri hydro scheme, about 13 per cent of the country’s electricity supply, is released.

But the reason it has been in everyone’s interests to avoid a “disorderly exit” of the smelter is that it will take some years to build the infrastructure needed to distribute that electricity to other power users.

National grid operator Transpower won’t complete the power line upgrades that will be needed to redeploy power from Manapouri across the South Island until 2022.

It won’t be until between 2025 and 2028 that Transpower will be able to fully rebalance the grid such that any surplus power could be diverted across the North Island.

In the interim, there is a real possibility that a significant proportion of the hydro potential of the South Island will go to waste, with more water spilled at dams.

Woods suggests the surplus electricity could find new uses in converting water into “green hydrogen” for the transport industry, or in powering data centres.

Let’s hope so.

But neither of those otherwise potentially desirable activities creates many long term jobs, beyond in their construction phase.

From a connectivity perspective, Southland is not the optimal location for massive data centres.

Tiwai Point aluminium smelter chief executive Stewart Hamilton discusses the closure of the smelter.

Woods suggested there was “a degree of inevitability” to Rio Tinto’s decision.

But I am confident that ministers did not think there was going to be an “all or nothing” outcome to the company’s strategic review when it commenced in October.

A gradual wind-down and managed exit of the smelter seemed the more likely and logical scenario.

Attributing “blame” for that not occurring might be a tricky exercise.

There was surely a deal to be done with electricity providers and Transpower.

The share price of electricity generators has been smashed by Rio Tinto’s announcement, which reflects the fact that the sudden closure of the smelter would be a nightmare outcome for them.

Meridian, Mercury, Genesis, Contact and Trustpower saw their combined value on the NZX fall by about $3.5 billion on Thursday, before a partial recovery.

Meridian should have turned a decent profit selling power to the smelter from Manapouri over the years, even at about 5c a kilowatt.

A price reduction – if only while Transpower built the infrastructure to carry Meridian’s power further afield – would be better than risking its turbines sitting idle.

The fact that Kiwi consumers pay a much higher price for power and are ripped off by the country’s bizarrely structured market is a separate issue, which is not being addressed.

After 13 years of deliberations over how power lines and upgrades should be paid for, the Electricity Authority paved the way in May for the smelter to get a break on its transmission charges to Transpower.

But with no likelihood of that being calculated before the second half of next year, it seems Rio Tinto lost patience.

After the smelter’s exit, it would fall on the smaller remaining pool of electricity users, including consumers, to pick up its Transpower bills – another unhappy outcome.

Perhaps there were just too many parties and too many moving pieces to get a deal over the line.

As Treasury has pointed out, given Tiwai smelts ore from Rio Tinto’s own mines in Australia, no-one other the company will truly know what the economics of operating the smelter really are.

Electricity generators and Transpower may have been unsure of how much ground they each, respectively, might yield.

Rio Tinto may have contributed to a suboptimal outcome.

The mining giant’s attempts to get public opinion on its side during negotiations appeared crude and to only contribute to the public’s suspicions that they were being ‘gamed’.

The Government has not shown much appetite to come to the aid of large privately-owed firms in the best of situations, and doesn’t appear to have needed much encouragement to wash its hands of the matter.

It might take a huge sea change in the public mood to prompt a backlash large enough to steer this one off the rocks.