REPORT OF HIS WORSHIP THE MAYOR, MR TIM SHADBOLT
EXTRAORDINARY COUNCIL MEETING, 5 APRIL 2013
TIWAI POINT ALUMINIUM SMELTER
Introduction
The purpose of this meeting is to examine the ways in which we as a Council can support the continuation of the Smelter operations at Tiwai Point, given its importance to the Southland and New Zealand economies.
I will also be taking the opportunity to correct some of the misinformation that has been broadcast and published about the Smelter operations and the recent bulk power negotiations.
The Smelter as it is today
Since the start of operations in 1971, the Smelter has commenced its ‘mid-life’ refurbishment. During the past 3 years, over $100m has been spent on capital renewals which have included:
Ø A new ship unloader ($40m)
Ø New cranes for reduction and carbon bake facilities ($20m+)
Ø New transformers
Ø New carbon baking furnaces ($20m)
A hold however on capital renewals is now in place until a satisfactory bulk power price can be renegotiated; however there is no reason why the Plant cannot remain in operation for another 30 years at least.
Rio Tinto has made it clear that it wishes to divest its interest in some of its Australasian aluminium assets and in 2011, transferred its holdings to Pacific Aluminium as a fully integrated aluminium business for that purpose.
These are:
Ø Gove operations bauxite mine and alumina refinery in the Northern Territory
Ø Boyne Smelters Limited in Queensland
Ø Gladstone Power Station in Queensland
Ø Bell Bay Aluminium in Tasmania
Ø Tomago Aluminium in New South Wales
Ø New Zealand Aluminium Smelters Limited (NZAS)
During the 12 month period to December 2012, NZAS made a loss of $50m and is currently projecting a further loss in the current 12 months to December 2013.
It is not a game of brinkmanship; it is a question of survival.
Power Pricing
It was the Holland Government in 1957 that initially invited Consolidated Zinc (later to become Comalco) to invest in New Zealand by building a Smelter and a power station at Manapouri which involved a 99 year contract. In September 1962, due to other financial commitments, the company could only afford the cost of the Smelter and the New Zealand Government undertook the construction of the Manapouri Power Project.
For the supply of power from Manapouri to the Smelter, Comalco agreed to pay:
Ø The cost of generation and transmission
Ø The capital cost of the Manapouri Power Project
Ø Plus a 10% premium on the sum of the above
This agreement was subsequently changed and renegotiated upwards by successive Governments.
However it is important to note that, had the Smelter not been built, there would not have been a Manapouri Power Station. In other words, it was built solely for the Smelter. To therefore claim that the Smelter has not been paying its fair share of the cost of bulk electricity is misleading. In fact it has been forced to pay more than its fair share given the original agreement between Comalco and the Government.
Whereas to the 12 months to December 2012, Smelter operations made a loss of $50m, it is estimated that Meridian Energy made a profit of $200m on the sale of power from Manapouri to the Smelter during the same period.
The Manapouri Power Station produces the most efficient power in New Zealand, and based upon the cost of production per megawatt hour in comparison to what Meridian is currently charging the Smelter, represents a profit margin of approximately 900%!
It gets worse. From 1 April 2013 Meridian want these super profits to increase by tens of millions of dollars, by increasing the electricity price charged to the Smelter. This will increase the profit margin to well over 1000%!
So from the original pricing agreement that applied when the Smelter opened in 1971 paying a premium of 10%, that premium is now at 900% and is about to increase to well over 1000%!
Is it any wonder that NZAS is wanting to back the truck up?
In addition to the above, NZAS also pay to Transpower $50m per annum. This is not based upon the cost of maintaining the transmission line from Manapouri to Tiwai Point, but transmission costs throughout New Zealand.
The Government has also suggested that if Tiwai ceased to operate, non‑commercial coal burning assets would be mothballed or decommissioned to rebalance energy requirements which leading economists suggest would further undermine the viability of Solid Energy and in particular its Waikato based mining operations.
The Government ‘Subsidy’/Meridian ‘Discount’
NZAS has never asked for a Government ‘subsidy’ on the price of power. A subsidy is not needed as Meridian is making 900% profit, so a commercial deal that is fair for both NZAS and Meridian is surely possible.
What they have asked for is a fair and reasonable price that will be sustainable in the long term. Current market pressures include the high New Zealand and Australian dollars; the high cost of electricity; the drop in demand and the lower price for aluminium.
Recent comments that Rio Tinto had walked away from negotiations are not true. I understand this was a very last minute offer that was not provided in writing and provided only hours for consideration.
This was unreasonable as the Board of Pacific Aluminium would have wanted to consider a written proposal that detailed the specifics and addressed the sustainability issue in the long term.
The restricted time period also did not allow for consultation with the joint venture partner in NZAS; the Sumitomo Chemical Company of Japan which owns 20.6% of NZAS. It is worth noting here that aluminium from Tiwai Point is the largest export item to Japan from New Zealand and is the purest aluminium produced in the world. For this reason the company’s aluminium is in 60% of the world’s memory disks for computers and 40% of capacitors (DVDs, TVs) worldwide.
Japanese customers are very concerned at the potential loss of aluminium produced by NZAS.
Tiwai Point Smelter is a world leader in labour efficiency, innovation, least accidents and produces the world’s highest purity metal which services 50% of the world’s niche high purity aluminium market.
Will New Zealanders benefit from cheaper power should the Smelter close?
For a start, the $50m currently paid by NZAS to Transpower will need to be reallocated amongst all New Zealand consumers.
Then there is the cost of upgrading the transmission lines, including the Cook Strait cable to get the power from Manapouri to the North Island.
Add another $100m? also to be paid for by electricity users.
Allow a reduction of 10% of the power generated due to transmission line losses.
Allow a further escalation in the profit margin currently charged by Meridian Energy (900%). The reason for this is that NZAS take 572 megawatts of power from Manapouri, 365 days per annum, 24 hours per day. This is a generator’s dream! Should the Smelter close, then the uptake of this power will become intermittent, unless another user like NZAS can be found, so in order to make the same level of profit, Meridian must increase the price.
If you think you will receive cheaper power should the Smelter close, think again.
It is also important to note that the Government announcements suggesting that the Australian State and Federal Governments have provided long term subsidies to the Australian Smelters are simply untrue.
An export led economy/recovery?
We have heard time and time again from the Government that we must increase the volume, quality and value of our exports to the rest of the world if we want to improve our standard of living and avoid becoming another bailout country like Greece.
Local government has also been criticised for continual rate increases that have added to the cost of production of our export sector.
Yet here right under our noses we observe exorbitant electricity prices being charged to Southland’s most successful exporter who also represents a major cornerstone of our local economy. Electricity supply and pricing is one of the most important strategic tools that the Government possesses to ensure that New Zealand processors and manufacturers can remain globally competitive and enable industry to add value to our primary production and exports.
I implore the Government and Meridian Energy to act in a fair and reasonable manner and negotiate a settlement that secures the future of our Smelter in the long term, and provides a good return to Meridian for the benefit of the Government and all New Zealanders.
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Tiwai Point Smelter Key Facts
Ø Contribute $525m or 10.5% of Southland’s GDP
Ø Directly employs 700 people and 80 contractors
Ø Directly and indirectly (positions in service operations ie engineering firms etc) employs 2,400 people
Ø Including associated central government employment (ie health, teachers etc) the Smelter has an employment effect of 3,200 full time positions
Ø Produces $1b of exports per annum
Ø Generates sales of goods and services in the Southland Region of $1.6b
Ø Annual production of the aluminium totals around 350,000 tonnes
Ø At 99.98% purity NZAS produces the purest aluminium in the world
Ø 40% greater labour efficiency when compared to any other Smelter of its type in the world
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