21 Jan 2016

Smelter could run at half capacity

9:30 am on 21 January 2016

New predictions pick the aluminium smelter in Southland is likely to stay open, but possibly in a scaled-down form.

Tiwai Point aluminium smelter.

Tiwai Point aluminium smelter. Photo: Wikicommons

The predictions come from utilities analyst Nevill Gluyas at research and broking firm First New Zealand Capital.

There have been suggestions for years that the smelter would shut down because of low aluminium prices.

It faced closure in 2013 but stayed on after winning a $30 million bailout from the government, and getting an undisclosed cut in the price it paid for its electricity from Meridian Energy.

Then last year the smelter negotiated a new agreement until 2030.

But this was open to early termination if needed, with 2018 being the possible shut-down date if conditions deteriorated.

That left New Zealand's electricity industry with a huge headache, since the smelter uses one-seventh of the nation's power.

If it shut, New Zealand would have too much electricity, but if it stayed open, New Zealand might not have enough.

In a new report, Mr Gluyas said that the smelter was just breaking even at present, despite low aluminium prices that had shackled it for years.

The price of the alumina raw material was also low, and the exchange rate was getting better for exports, he added.

And the price of aluminium should rise slightly over the next few years, while capital expenditure could be deferred and electricity transmission prices could fall, depending on the outcome of a review by the Electricity Authority.

Mr Gluyas added another reason: shutting down the plant might be more expensive than keeping it open.

Under environmental law, the company would have to return the land under the smelter to the condition it was in before the factory was built.

He put that price at $225 million in addition to $50 million held in trust.

In his comment, Mr Gluyas went on to put a figure on the price paid by the smelter for its electricity.

This had been a closely guarded secret for years, but Mr Gluyas produced an estimate of 4.8c per kilowatt hour.

That contrasted with spot prices for other customers which ranged from 6 to 8 cents per kilowatt hour, though they can go much higher.

At that 4.8c price, there would be little room for any further reduction in the price it paid for power, Mr Gluyas said - and in fact some of the smelter's electricity would go up in price based on the fine print in last year's agreement.

So Mr Gluyas had forecast an alternative scenario: a decision to carry on production at the smelter, but at half capacity from 2018 onwards.

The smelter is majority owned by the international mining giant Rio Tinto.

It hires 800 full-time workers and contractors and estimates it directly and indirectly pays for the livelihood of 3000 people.

That added up to 10 percent of Southland's GDP, and local officials in the area have vowed to fight any closure.

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