By Benje Patterson*
The eventual closure of the Tiwai Point aluminium smelter is an inevitability that needs to be embraced.
Although the smelter is said to produce some of the world’s purest aluminium, the reality is that aluminium buyers aren’t prepared to pay enough of a premium for Tiwai’s product to ensure the smelter’s long-term survival.
With this harsh reality in mind, this article considers the plight of the 800 odd employees who will face the prospect of lower incomes and the cost of searching for new jobs when shutdown day eventually comes.
Tiwai’s owners, Rio Tinto, announced last week that the smelter made a pre-tax loss of $91.5 million over the year to December 31. The company blamed the loss squarely on high spot electricity prices, combined with sharply lower aluminium prices.
However, the crux of the underlying problem runs deeper.
The reality is that Tiwai’s remote location and relatively expensive workforce mean that the smelter can’t compete with a glut of cheaper Chinese aluminium production.
Tiwai was only ever built in such a remote part of the world due to the availability of cheap hydro power, and it is only the continuation of preferential electricity pricing that is ensuring the smelter’s survival.
Even factoring in lower national electricity demand in the absence of the smelter, it is widely acknowledged that Meridian would earn a higher rate of return selling its generation on the open market.
Meridian’s electricity contract with Tiwai effectively boils down to a state-owned enterprise subsidising an industry.
And Rio Tinto knows all of this.
After having unsuccessfully tried to wrangle a further discount out of Meridian, Rio Tinto seems resigned to the fact that the smelter is of little future value.
The company has written down the book value of Tiwai from $606.9 million to $14.8 million. In financial terms, this valuation means that, even with preferential electricity pricing, Rio Tinto expects the smelter to do little better on average than breakeven.
The effects of a shutdown
The effects of Tiwai’s closure on the national economy would be relatively contained.
After all, aluminium only accounts for just over 2% of New Zealand’s export earnings.
In the short-term, there would be a temporary hit to exports, but over the long-term the national economy would benefit from the redeployment of electricity and labour into industries which we are more internationally competitive.
However, the same cannot be said about the regional effects of the shutdown and the plight of Tiwai’s former workers. The closing of Tiwai would have profound effects on Southland’s economy and labour market.
The Southland economy would in all likelihood fall into a recession, and many of Tiwai’s former workers would face the prospect of a prolonged period of unemployment unless they moved, retrained, or were willing to accept lower paying employment.
A generation of workers in Southland’s labour market have become institutionalised in the Tiwai environment.
Subsidised power led to the creation of well-paid positions and accrual of skills that would not have otherwise been demanded by the wider labour market.
This artificial disjoint would leave some former Tiwai employees with a tricky transition into comparably paying employment should the smelter close.
Parallels can be drawn between the current situation for Tiwai’s employees and car assembly workers left jobless in the late 1990s. Both industries flourished because of some form of government intervention.
Tiwai survives because of preferential power pricing, while New Zealand’s car assembly industry only ever existed due to sizeable import tariffs on cars.
Not surprisingly, when the government decided to withdraw these protective motor vehicle tariffs in 1998, domestic assembly plants could not compete with the price of imported vehicles and were forced to shut down. These closures left thousands of car assembly workers jobless.
The case for transitioning assistance
As with Tiwai, many of these assembly workers had dedicated a large proportion of their working life to an industry whose labour demands were quite different to those of New Zealand’s broader labour market. However, despite this disjoint, additional support from the government to help with their transition into other employment was not forthcoming. The government gave a mere $400,000 of funding for communities affected by car assembly job losses on top of normal social support and employment assistance.
I find this lack of additional support somewhat callous.
Car assembly workers had acquired a specific skillset on the understanding that society wanted to support the industry, as a result, the government’s decision to remove car industry tariffs essentially boiled down to changing an implicit social contract.
The government should have recognised its role in the problem and gone out of its way to assist these workers’ reintegration into the labour market. It was a change in government policies that undermined the value of the human capital these workers had developed – which suggests that as a matter of fairness, these workers should be compensated for that loss.
A similar changing of social contract is occurring at present in the case of the smelter.
If Meridian and the government continue to stonewall Rio Tinto’s attempts to get larger implicit power subsidies, then the government is effectively saying it no longer deems it important for society to support the smelter’s continuing operations.
To mitigate the consequences of this decision, the government’s focus should turn to the future welfare of the smelter’s 800 odd workers, who will face less lucrative employment prospects in the broader labour market.
After all, it was only because of government intervention that Tiwai’s employees acquired skills in the aluminium industry in the first place and it is now the government that is helping pull the rug out from under these people.
The least the government can do is recognise its role in the problem and ensure careful support is given to ease the transition of these people into other employment.
Benje Patterson is an economist at Infometrics. You can contact him here »