Can Southland's economy cope if the smelter doors are shut?

Monday, 28 October 2019

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

A dire picture has been painted around the potential closure of the smelter at Tiwai Point. Could Southland cope if this major business shuts its doors? Logan Savory reports.

This may be a situation that Southlanders don't want to ponder, but what would life be like if the New Zealand Aluminium Smelter does close its door?

Economist Cameron Bagrie doesn't pull any punches when it comes to the smelter's situation.

He says Southlanders won't like it, but according to him, it's 'time to bite the bullet'.

'Southland needs to start thinking about plan B. Irrespective of what happens with this [electricity] contract, [the smelter] won't be around forever.'

* Bluff aluminium smelter could close taking power prices tumbling

* Rio Tinto considering closing Tiwai Aluminium Smelter**

Last week, Rio Tinto announced on the Australia Stock Exchange that it will conduct a strategic review of its interest in New Zealand's Aluminium Smelter to determine the operation's ongoing viability.

It says under the current market conditions and with high energy costs, 'we expect to the short to medium outlook for the aluminium industry to be challenging and this asset to continue to be unprofitable'.

It plans to talk with the New Zealand Government and energy providers to explore options.

It's not the first time the smelter's bosses have gone to the Government to plead its case.

Economist Cameron Bagrie urges Southland to get on with sorting out plan B, saying the smelter will close, it's just a matter of when.

In 2013 the then National-led Government stumped up with a $30m subsidy as part of an electricity agreement with NZAS.

But it came on the proviso that there will be no further Government handouts for New Zealand's only smelter.

Current Energy Minister Megan Woods says there's no change from the message that was rolled out in 2013. There will be no more taxpayer assistance for NZAS.

According to Bagrie Southland's leaders needs to adopt a 'half glass full' approach and focus on new areas where Southland's economy can grow, rather than believing the province's survival hinges on keeping the smelter at Tiwai Point open.

'Is the smelter a big part of the Southland economy? Yes. Is the smelter behind Southland's growth in the last 10 years? No.'

He says manufacturing, a sector the smelter falls into, has been one of the lowest growth areas for Southland's economy during the past decade.

While the likes of the professional services sector, and food and accommodation, has seen close to a 200 per cent growth for Southland during that same time, Bagrie says.

Bagrie sees huge potential in aquaculture in New Zealand and feels Southland is well positioned to tap into that.

Aluminium ignots at the Tiwai Point aluminium smelter. (File photo).

Aquaculture has already been identified as a potential growth area on the back of the Southland Regional Development Strategy [SoRDS] put together in 2015.

Mark O'Connor - who heads the Southland Aquaculture Working Group - says there has been plenty of work happening in the aquaculture space.

They have been working with the Government's Provincial Development Unit, which administers the Provincial Growth Fund, on a particular project they have identified for Southland.

But can aquaculture really fill the potential gap of close to 1000 jobs, as well as the other benefits that come with having the smelter in Southland?

Great South chairman Ian Collier points out the push for diversification of the economy is already a key focus. But he adds NZAS has played a huge role in the Southland economy for decades and needs Southland's support at the moment, as well as New Zealand's for that matter.

NZAS says it contributes over $406 million to the Southland economy and makes up 6.5 per cent of Southland's GDP with export revenue of about $1 billion each year.

About 990 full-time equivalent employees and contractors work at the smelter and it has indirectly created more than 2200 jobs.

Great South is helping NZAS with any information it may need to help them put the strategic review of the smelter together.

Dr Aaron Fox shares similar thoughts to Bagrie in regard to Southland looking at life after the smelter.

Fox spent 13 years, up to 2001, putting together a thesis called The Power Game. It is an extensive piece of work that looks into the development of the Manapouri-Tiwai Point electro-industrial complex.

Power lines at Wairo near Nightcaps which run from Lake Manapouri to the Aluminium Smelter at Tiwai Point. (File photo).

The Tiwai closure is inevitable, whether it's now or a few years down the track, Fox says.

Southland's leaders need to look at other industries which could potentially tap into the power generated at Manapouri.

He threw up the tech industry as a possible opportunity.

One idea is whether Southland could buddy up with a tech company to establish a factory to manufacture the likes of silicon chips.

Fifty years ago Southland's leaders showed the foresight to help get the smelter operating at Tiwai, Fox says. According to him, it's the current leaders turn to do the same, but with a different industry.

While within the Southland boarders the closure talk has fuelled some real concern, outside of the province it has been met with a sense of apathy.

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

Some have even rubbed their hands at the prospect of the smelter closure, believing closure will increase the electricity supply and in turn decrease electricity prices.

The smelter uses about 13 percent of New Zealand's electricity, the equivalent of about 776,000 houses.

Fox doesn't believe it is as simple as saying the smelter's closure will mean more power for the rest of the country.

He says the Manapouri operation was built to supply continuous high load electricity to Tiwai.

It's not suited for the national grid and the supply of domestic customers, he says.

Aerial photo with Bluff township and Bluff Hill, back, and Tiwai Aluminium Smelter front.

'I tell people it would be like using a Formula One race car to go supermarket shopping.'

'If and when Tiwai closes then the best replacement [electricity] consumer would be another industry.'

NZAS chief executive Stew Hamilton says the latest threat of closure is real. He says they've been losing money for some time and it's serious.

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

Invercargill Mayor Sir Tim Shadbolt, Invercargill MP Sarah Dowie, and Southland Chamber of Commerce president Neil McAra have all painted a bleak picture of what Southland might look like without the smelter.

Dowie goes as far as saying 'Southland will be destroyed' on the back of a smelter closure and the centralisation of the Southern Institute of Technology into a national institute.

Workers seen casting aluminium during Prime Minister Jacinda Ardern visit to the Tiwai Point Aluminium Smelter in 2018.

Shadbolt says the hurt attached to the closure of the smelter would be wide-ranging.

'There would be a substantial revenue loss for South Port, the transport sector would also suffer and the opportunity for students to gain engineering qualifications would be lost.

'The financial impact would be huge. Not only for the 1000 workers at the plant but also numerous small engineering workshops that depend on the smelter for a substantial amount of their business.'

'We are in constant contact with [NZAS] representatives to ensure there is a minimum impact in the event the closure, but we are determined to make every effort to ensure this does not happen.'

The official re-opening of Potline 4 at the Tiwai Point Aluminium smelter in December.

Shadbolt says the quest at the moment is to try to get their key messages through to the rest of the country.

'Our first goal is to educate New Zealanders regarding the fact that any financial support for the smelter will consist of a rebate, not a subsidy.'

Tiwai Aluminium Smelter at night with Bluff Hill in the background. (File photo).

McAra describes the electricity situation for NZAS as simply unfair.

NZAS paid nearly $200 million over the past 10 years for transmission infrastructure it does not use in the North Island, Hamilton says.

'We have had no choice but to absorb these costs which has placed undue pressure on the operation.'

This year it is paying $64.5m, up from $41.8m in 2008.

A proposal is in place where the Tiwai smelter's transmission would be reduced by about $11m, but not until 2024.

That's too little too late, Hamilton says.

Owners Rio Tinto says it will work with all stakeholders to find a solution to ensure a profitable future for this plant.

If closure is found as the only option on the back of the strategic review, Rio Tinto would need to provide 15 months notice before the operation is actually shut down.

With a deadline looming in March 2020 - just how fast could Southland pull together a plan B if it had to?