As the price of aluminium breaks new records, closing in on $US3000 a tonne, global giant Rio Tinto must be having a quiet chuckle to itself.
Only a year ago it was threatening to close the Tiwai Point aluminium smelter, consigning it to the scrap heap with the loss of 700 jobs, directly, and another 1600 indirectly. For Southland’s economy it would have been a mortal blow.
At that time, aluminium was fetching only $1800 a tonne.
Rio Tinto said the smelter was uneconomic because the price of electricity was too high. In July last year it said it would close the operation because of high costs and a challenging market.
The decision to close the smelter had disappointed politicians and local power firms as it came when the COVID-19 pandemic began to cripple the economy.
Some economists argued NZ should let it go and divert the Manapouri electricity, the cheapest in the country, to other uses.
But the government flinched at the loss of jobs. Instead it ensured the 51% State-owned Meridian Energy reduced the already low cost of power still further.
The miner then said that while talks were ongoing with the government to address the smelter’s high transmission costs, the deal with Meridian over power prices would make the smelter economically viable.
“This agreement improves Tiwai Point’s competitive position and secures the extension of operation to December 2024,” Rio Tinto Aluminium chief executive Alf Barrios said in a statement.
And Finance Minister Grant Robertson trumpeted:
“Today’s news is particularly welcome given the economic uncertainty created by the global COVID-19 pandemic”
Prime Minister Jacinda Ardern had earlier indicated she would negotiate with Rio Tinto to extend the smelter’s operations.
It is a joint venture between Rio and Japan’s Sumitomo Chemical Co. Rio had an underlying loss of NZ$46 million ($33.1 million) in 2019 arising from it.
As the aluminium price keeps climbing, the question is whether Rio Tinto will keep it going beyond 2024, the date set under the agreement for its closure.
The Tiwai Point smelter produces some of the lowest-carbon aluminium in the world.
Robertson and energy minister Megan Woods, who negotiated with Rio Tinto to keep the smelter open, said at the time the deal provided welcome certainty to the Southland community by protecting jobs and incomes as the region planned for the future.
The four-year deal would help protect jobs and incomes in Southland and provided a timeline for the Southland community to work alongside the government to map out a clear transition plan for the region for the time when the smelter shut down, Robertson continued.
“The strong relationship between the government, local authorities and the Southland business community means we are in a good position to map out a transition plan which allows for high wage jobs to remain in Southland as the region transitions, while providing new opportunities for economic growth in the region”
Meridian’s announcement that it was actively developing new growth opportunities for when Tiwai closed, including process heat, IT infrastructure and green hydrogen, highlighted the opportunities for high-paying jobs that the Southland region had as the transition was made.
“The strong relationship between the Government, local authorities and the Southland business community means we are in a good position to map out a transition plan which allows for high wage jobs to remain in Southland as the region transitions, while providing new opportunities for economic growth in the region,” Woods said.
“Understanding the extent of the environmental impact of the smelter and removal of toxic waste from this site remain a bottom line for the Government.’”
Contact Energy chief executive Mike Fuge also welcomed the news that the life of the smelter would be extended until at least the end of 2024 while an economic transition for Southland was developed.
As part of the arrangement, Contact has agreed to supply Meridian Energy with a portion of the electricity required to power the NZAS smelter at Tiwai Point. Contact will provide an average of 100 megawatts of baseload electricity through until the end of 2024 (assuming the smelter requires 572 megawatts of electricity).
Analysts say Rio Tinto managed to beat down the price it pays to power the Tiwai Point aluminium smelter by more than a third, from about 5.5 cents per kilowatt hour to about 3.5c/kWh. And there are many Southlanders who believe Rio Tinto is likely to seek to extend the electricity contract beyond 2024.
It is estimated the new pricing will cut the smelter’s power bill by about $100m a year.
A price of 3.5c/kWh/hour would mean the smelter was paying only about 12% of the standard rate Meridian charges residential customers for power.
Whose betting Rio Tinto won’t seek to extend the sweetheart deal they have landed?