Benje Patterson says the economic viability of the Tiwai Point smelter has gone and we now need to help the workforce into new roles

Benje Patterson says the economic viability of the Tiwai Point smelter has gone and we now need to help the workforce into new roles
Rio Tinto has written down the plant. How long before it is closed? And, what about the workers?

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 »

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I was speaking to a friend two days ago that works on the potlines. He says he goes to work every day expecting to be told he doesn't have a job. I suspect the falling dollar may save the smelther yet but I guess we will see about that. The interesting psyche in Invercargill is that if you get a job at the smelter you are made, so it does pull skilled tradespeople from the market to the higher and easier money. The closure of the smelther would have wide reaching effects, particularly on the inflated housing market, as those 800 staff would all fall into the top 5% of salary earners in the city.

"....800 staff would all fall into the top 5% of salary earners in the city"
I hate to say it but is that part of the problem?

Perhaps. The place runs 24/7 so a good portion of the salaries is a top up for the shift work. They want to attract skilled workers so have to pay a premium to get them there, then the shift allowance on top of that. Could it be that initially salaries were not so high but given the wealth effect of the smelter it has become a death spiral?

The case for Tiwai closing is not compelling in my view; or at least we don't know enough for it to be compelling.
The author says it produces "only" 2% of NZ's exports. That 2% seems a lot to me, and would not easily be replaced. Would demand really go to industries that are more competitive, or would we just blow it? How economic would the plant be if the NZD was valued at say a level that meant our current account was in balance- say a depreciation of 10-20% from where we are now? If the answer is that it would be quite profitable, then it should stay open; while finding alternative industries at a higher rate will be unlikely. 
Rio may well not be the ideal owners. We read yesterday that the Chinese are now genuinely trying to battle their own pollution. So from their point of view, keeping coal fired plants feeding aluminium smelters in China, while closing or wasting hydro here, doesn't seem optimal. Thay also are more likely to play a long game. The Japanese similarly may be long term interested players.
So it seems to me there are still options available, and questions to be answered, that mean we should not sleepwalk to the plant closing. Absolutely negotiate hard enough, and make sure whatever eventual deal could be done is in fact in NZ's broader interest, and not just a gift offshore. But a win win still could be possible, even if not with Rio.

Have to say "yeah right" to that article.  Tiwai now has a book value of $14 Million.  Betcha if one fronted up to Rio with a cheque for that much, and an purchase agreement that supply chain of alumina etc etc that Rio would run a mile.  Or certainly not sell it to you for that price.

Maybe, maybe not.  I understand that if Rio shut the plant, they would, by contract, have to fully remediate the site, an expensive proposition.
I stared at the "$14 mill" bit too, but if it has a limited future than it might make economic sense - there would be an expensive liability associated with ownership.
Interested in any further comment on this aspect.

" it is the government help to pull the rug out from under these people."   Pardon.  Is this from the school of belief that's convinced that nothing happens unless the government does it?

Convert it to a Nissan Leaf factory - after all, if we have to subsidize something, why not 'lectric transport.  Potline workers, retrain as assembly line - er - assemblers.
Then with the 16% of 'lectricity generation freed up, build out a beefed-up power network (Transpower estimates this at around 3 years and a few hundred million - say about a month's Benefit cost.  More skilled work for displaced Tiwai workers.
Then, sell those Leafs locally (lotsa salesperson roles there, for the Tiwai office and admin staff)  - plug them cars into the grid, and drive around forever.  After all, if them old Chevy's can last nigh on 70 years in Cuba, I'm sure a Leafy Nissan, juiced up on clean clear Manapouri water, can better That.
Crazy idea, I know.
Just could work.

Now there's some radical thinking. I like the ideas. Good ideas often come from difficult situations.
But can you really see that happening? Anyway, 70-year-old cars totally violates the idea of planned obsolescence and continual consumption, so no-one except car drivers would actually want to see it.
If Tiwai did close, I'm guessing many of the workers there would become part of the slow northern drift of population.

High time we have a rational look into this Goverment aided subsidises Private enterprise..
Rio is worth Billions to its shareholders ...NOT NZ  Goverment or population....
The fact that the economy of NZ could have benefitted from cheaper electricity all the while from the largest hydro electricity producer in the country all these years seems to have escaped the minds of kiwis....more efficient industries ? Cheaper products ? Better qualuty of live ??
Yet we are now moaning over loss of 800 jobs of highly qualified people (who because they are "highly qualified" can easily relocate for better jobs elswhere) and the passing of a foreign Giant Multinational who has held the economy of NZ ransom for cheap subsidised electrcity for decades.....

Convert it into closed in feedlots for cattle...or into a new Parliament building for the circus...flog off the old one to the Chinese.

Firstly Rio Tinto are being dishonest in the fact that the Smelter is 44 years old and probably they have underinvested in efficiency improvements, Secondly Transpower will have a nice big construction project building a line from Manapouri up to Benmore to ship the power north, so job oppourtunites there methinks

when the Greens seize power  next year Potlines will be mandatory , NZ wide

I actually thought that big State subsidies for businesses was supposed to have gone the way of the dodo with Rogernomics, it all seems a bit anachronistic really.  Especially when the price to the retail consumers goes up inexorably; effectively all power-using households in NZ are paying a subsidy to Rio.

How about asking the ex nz rail workers and the soon to be made redundant nz post workers.

The 800 workers could form a Company and purchase the smelter from Rio.

800 workers might be able buy Tiwai for $14 million but they could not afford the $90 annual losses. Unless they all offered to work for $112,000 a year less!

Brendon - There are opportunities everywhere and that was the point in my post above.
The plant value has been written down to $14.8 million from $606.9 million.
Total operating revenues according to the herald article above were $756.8 million.

Should save on carbon credits if all that gas and coal does not have to be burnt to keep the Beehive etc supplied with electricity