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Tiwai Point smelter looks safe, despite global glut: First NZ Capital

Wednesday 20th January 2016

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The future of the Tiwai Point aluminium smelter appears to have become a little more secure, with the Rio Tinto-controlled plant thought to be roughly breaking even, largely thanks to a lower New Zealand dollar and the fact the price of alumina has fallen more than that of the finished product.

Those are the key conclusions of a research note issued to clients by broking firm First NZ Capital in an assessment of the prospects for the New Zealand electricity sector this year.

"Tiwai remains a key uncertainty for the industry," the note says, with options to cancel existing electricity contracts triggered in April and in January next year ahead of possible closure in early 2018 or a staged reduction in output. "Surprisingly perhaps, we think the risk of an early 2018 exit remains low despite bombed out aluminium prices."

The smelter uses 13 percent of all the electricity generated in New Zealand, with its closure creating potential both for over-supply and the early closure of more fossil fuel-fired power stations than has already been announced.

Noting comments by Rio's head of aluminium, Alf Barrios, in December that he would not tolerate running smelters that were free cashflow negative, FNZC says it sees "wiggle room from low alumina prices and a softer New Zealand dollar", and the potential to defer capital expenditure from usual levels of around US$90 per tonne to around US$60 per tonne.

"Our figures suggest it's possible Tiwai is operating at a cash neutral margin. Significant New Zealand dollar appreciation and even lower aluminium prices would need to transpire before we would become more concerned about exit risk. At present, both seem unlikely."

Credit Suisse economists have lowered their forecast for premium aluminium prices to an average US$1,660 a tonne in 2016, rising gradually to US$1,970 per tonne by 2019, against an assumed cost of production per tonne at Tiwai of US$1,650 per tonne, including US$60 per tonne of annual capex.

While the world's most efficient smelters are believed to be producing metal at around US$1,450 per tonne, "more than half the world's smelters output is thought to be losing cash at current prices."

While positive cashflows at Tiwai Point don't necessarily equate to a profitable operation, other factors were also in play in its owners' considerations, including the $225 million cost of returning the smelter site to its original condition if it closed and the potential for cuts to its electricity transmission charges of up to $60 million, based on controversial proposals from the Electricity Authority which may conclude early this year.

In the meantime, a greater fall in the price of a key input, alumina, than the fall in the price of finished metal was also likely to be helping the smelter's economics, FNZC said.

Its forecasts "imply a NZ$25 million cash positive position, which then continues to improve in subsequent years ... even after allowing for a step up in electricity charges."

That said, FNZC expects New Zealand Aluminium Smelters, the Rio subsidiary that operates Tiwai Point, will seek to renegotiate its electricity contracts, as it did before the partial privatisation of its main supplier, Meridian Energy, in October 2013.

FNZC ranks Contact Energy the most attractively priced electricity company share in the New Zealand market, saying it is "trading below fundamental value and multiples indicate it's cheap relative to its closest peers", Meridian and Mighty River Power.

Meanwhile, MRP today released quarterly operational data showing that it failed to gain from a 0.9 percent increase in national electricity demand in the last three months of 2015, losing some 1,000 customers from the September quarter and with electricity sales prices falling 1.5 percent and sales volumes down 7 percent compared to the December 2014 quarter.

"A reduction in overall customer sales volumes reflects the highly competitive market across both residential and commercial," MRP said. "The average electricity price to customers was $110.94/MWh, lower than (the) prior comparable period. This was due to additional discounted offers to customers and Mighty River Power absorbing increases in lines and transmission costs for its customers on fixed-price contracts."

 

 

 

 

BusinessDesk.co.nz



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