Taxpayer support for New Zealand Aluminium Smelter not an option, says Energy Minister Megan Woods, as owner considers closure

By David Hargreaves and Jenée Tibshraeny 

The Government isn't prepared to put more money towards helping keep the Tiwai Point aluminium smelter open. 

New Zealand Aluminium Smelters' (NZAS) major shareholder, Rio Tinto, has announced the smelter could be closed, pending the outcome of a strategic review about to get underway. 

The review will also see it talk to the Government and energy providers in the hope of finding a "pathway to profitability".

"Under current market conditions and with high energy costs, we expect the short to medium outlook for the aluminium industry to be challenging and this asset to continue to be unprofitable," Rio Tinto said.

The uncertainty created by the announcement from Rio Tinto saw the Meridian shares hammered on the NZX on Wednesday. Its stock fell in morning trading by 42c, or 7.75%,  to $5. The prospect of a surplus of power being created by the smelter closure saw other big generators hit too, though, with Mercury Energy dropping 31c (5.7%) to $5.14, while Contact Energy shares dropped 62c (7.3%) to $7.90. 

NZAS employs around 1000 people. It's New Zealand's largest electricity user, comprising 14% of demand. 

Energy and Resources Minister Megan Woods 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. This hasn’t changed."

The National Government in 2013 contributed $30 million towards the smelter to keep it operating. It was undertaking a partial privatisation of state-owned power generators, including Meridian (which supplies the smelter with energy), at the time. 

"This review is a commercial process by a commercial operator," Woods said.

"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.

"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 said its strategic review would "consider all options, including curtailment and closure" and will be complete in the first quarter in 2020.

Meridian said it had offered to make concessions on its contract with NZAS, but these didn't go far enough for NZAS. It said it already offers very low-cost electricity and remains open to negotiations.

NZAS can currently fully terminate its contract with Meridian, or reduce electricity consumption from 572MW to 400MW, provided it gives a year's notice. 

Meridian's share price fell by 7.75% on the news.

NZAS is a joint venture between Rio Tinto (79.36%) and Sumitomo Chemical Company Limited (20.64%).

The closure or non-closure of the smelter is an issue that keeps raising its head. See earlier articles here.

See the metals price chart below - click on the arrow to select aluminium. 

Here's Meridian's full statement:

Smelter owner Rio Tinto initiates strategic review

Meridian Energy has been advised by New Zealand Aluminium Smelters Limited’s (NZAS) major shareholder Rio Tinto, that they intend to initiate a strategic review of the smelter. The review will consider all options for the future of the smelter, including the option of closure. Rio Tinto has advised Meridian that it will provide the market with an update on the strategic review by the end of the first quarter in 2020.

The electricity contract between Meridian and NZAS allows for full termination or for NZAS to reduce consumption from 572MW to 400MW, in both cases on 12 months’ notice to Meridian.

Chief Executive of Meridian Energy, Neal Barclay, says that the parties have been in dialogue for some time and “NZAS officials have advised us that the economics of the smelter have been challenged due to volatile international prices for aluminium, relatively high energy and transmission costs and an upcoming refurbishment bill to keep one of the potlines operational.” During that time Meridian had tabled a number of proposed changes and concessions to its existing contract with NZAS. “NZAS has advised Meridian that the changes we had offered to date on our contract fall short of the pricing for delivered energy that NZAS needs to re-establish its position as an internationally competitive aluminium smelter,” says Barclay. “We remain open to negotiating with NZAS and its shareholders on the long-term requirements for the smelter.”

History of the smelter contract and remediation

The contract between NZAS and Meridian runs to 2030 and provides price certainty for the smelter on 572MWh per hour (5,011 gigawatt hours per year) of electricity.

Meridian and NZAS entered into the current contract following a renegotiation in 2013. That renegotiation provided the smelter with greater flexibility in its operations, meaning it could reduce its contracted volume from 572MW to 400 MW on 12 months’ notice. The deal also gave NZAS the provision to terminate the contract completely on 12 months’ notice.

In the 2013 renegotiations the parties agreed to a reduction in the previous electricity price but also allowed for price increases should the NZ dollar value of aluminium rise above agreed levels. This provision was to assist NZAS to establish a competitive cost position for the future.

Meridian agreed a new and separate electricity contract with the smelter in May 2018, providing NZAS with price certainty for an additional 50 MW (438 gigawatt hours per year) of electricity that was utilized to open the smelter’s fourth potline.

In the event of closure, the smelter owners would incur significant remediation costs, recently estimated by NZAS to be in the region of NZ$256 million.

Here's Rio Tinto's full statement:

Rio Tinto will conduct a strategic review of its interest in New Zealand’s Aluminium Smelter (NZAS) at Tiwai Point, to determine the operation’s ongoing viability and competitive position. Under current market conditions and with high energy costs, we expect the short to medium outlook for the aluminium industry to be challenging and this asset to continue to be unprofitable.

Rio Tinto intends to hold discussions with the Government of New Zealand and energy providers to explore options and identify economically viable solutions to find a pathway to profitability for the asset.

Rio Tinto Aluminium chief executive Alf Barrios said “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.”

The strategic review will consider all options, including curtailment and closure and will be complete in the first quarter in 2020. NZAS is a joint venture between Rio Tinto (79.36%) and Sumitomo Chemical Company Limited (20.64%) and employs around 1000 people.