Soaring aluminium prices look likely to encourage Rio Tinto to press for extending its Tiwai Point sweetheart deal

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.

Woods said:

“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.

Robertson added:

“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?

One thought on “Soaring aluminium prices look likely to encourage Rio Tinto to press for extending its Tiwai Point sweetheart deal

  1. The problem all along has not been the price of the electricity but the ridiculous standardised price for maintaining the transmission line.

    Like

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