Rio Tinto has announced plans to close the New Zealand Tiwai Point aluminium smelter, in a decision that will cost more than 1,000 local jobs, take a massive bite out of the country’s electricity demand, wipe billions of dollars from the value of that country’s electricity suppliers, and will sound the alarm for Australia.
The resources giant said on Thursday it would start preparing for an August 2021 closure of New Zealand Aluminium Smelters (NZAS) after a strategic review found the business “no longer viable given high energy costs and a challenging outlook for the aluminium industry”.
The smelter in the south of New Zealand’s South Island is the country’s biggest single electricity consumer, accounting for about 13 per cent of total power demand, the equivalent of 776,000 households, most of which is supplied by Meridian Energy’s Manapouri hydro scheme.
The first order of business on Thursday was the termination of the contract with Meridian to supply the NZAS, which Rio owns (79.36%) and in a venture with Sumitomo Chemical Company of Japan (20.64%).
“It is not a decision we have made lightly and without significant careful consideration,” Rio Tinto Aluminium chief executive Alf Barrios said on Thursday.
“It is very unfortunate we could not find a solution with our partners to secure a power price reduction aimed at making NZAS a financially viable business. We will therefore terminate the power contract and move to close the operation.”
Back in October of 2019, when the strategic review was first undertaken, the head of NZAS New Zealand operations indicated it needed “tens of millions” in annual relief of both transmission costs and electricity pricing to survive.
A 25 per cent slump in aluminium prices over the last 18 months, increasing power costs, and over-capacity had affected the smelter, which in February posted a $46 million loss.
But the government would not budge. Energy Minister Megan Woods said on Thursday she was disappointed in the decision to cancel the “generous power contract” with Meridian and close one of the world’s lowest carbon aluminium smelters in favour of keeping open coal plants.
“This day has unfortunately been on the cards for some time now, but nevertheless the final decision is a blow to Southland and all those who work at the smelter,” Finance Minister Grant Robertson added.
But it’s an equally big blow to New Zealand’s energy market, with NZ generation company Contact Energy warning that the “disorderly exit” of this sort of electricity demand will push up power prices for all consumers. Their share prices slumped on Thursday on the prospect of an over-supply in the market, with up to $NZ3 billion wiped off the market value of Meridian, Contact Energy, Genesis Energy and Trustpower.
“The reality is that NZAS has subsidised transmission costs to consumers for years,” said Contact chief executive, Mike Fuge.
“Not only will those costs now fall to other customers, there will also be additional costs for the significant transmission investment from Transpower now needed to shift surplus energy from the lower South Island north to where it is needed.”
Fuge said Rio’s decision to cancel the smelter’s electricity contract with Meridian was “very disappointing” in light of the combined effort of NZ energy companies had made to deliver what he said were “significant cost reductions” for electricity.
“We’re very disappointed to have played our part in delivering these savings for one of the greenest smelters in the world and to have such limited engagement from Rio Tinto,” he said.
“We urge Rio Tinto to seriously consider the offer for improved electricity supply and encourage them to consider what is right for Southland, for New Zealand and for their own global environmental commitments.”
Meanwhile, in Australia, the news will send a chill through the local aluminium smelting industry, which faces almost identical headwinds of changing market dynamics and increasing power costs, topped off by a complete lack of guidance on emissions and/or the low-carbon energy transition from the federal policy level.
The smelters use a huge amount of state demand – more than 10 per cent in the case of the Tomago smelter in NSW, and the Portland smelter in Victoria.
Just last month, Australia’s peak trade union body issued a timely reminder to the Morrison government that all four of Australia’s remaining aluminium smelters were currently under review themselves – partly as a result of growing international demand for aluminium produced with renewable energy and partly as a result of energy security concerns and electricity price fluctuations.
“The absence of a credible emissions or energy policy nationally jeopardises the future of all of these smelters and many other manufacturing and processing businesses,” the Australian Council of Trade Unions said in a submission to the Coalition’s Technology Roadmap discussion paper.
“These and other asset owners will need much more immediate steps to match their energy usage profiles with declining emissions sources in order to continue operations and remain internationally competitive.
“Australia may well have a competitive advantage in renewable energy powered mining, metals processing and manufacturing, but it will not be realised if we have to start rebuilding our manufacturing industries from scratch.”
Others, including the Australian Greens, have argued that state and federal governments should help subsidise, or incentivise, the transformation of Australia’s remaining aluminium smelters into “reverse batteries,” that limit production to when there is a glut in supply of wind and solar, while also allowing strategically reducing energy use at times of peak demand when prices are high.
Similar ideas have been promoted by others. See: Australia’s big smelters could also be giant batteries, and go green at same time.
“Taxpayers already give Alcoa $50 million a year in a secret deal arranged by the Andrews Labor government. Instead of giving them taxpayer money to use polluting coal power, why not give them a grant to use renewable energy and become a ‘reverse battery’?,” acting leader of the Victorian Greens Ellen Sandell said.
“If we do nothing, Alcoa is likely to close and 1,500 people will lose their jobs. Instead, we could upgrade the smelter so it runs on renewable energy and is also able to cut its energy use during days of peak demand, which brings down bills for every Victorian. This is an innovative idea that saves jobs and saves the climate – what’s not to like?”