'Deeply favourable cocktail' putting Tiwai Pt aluminium smelter in the black

Tuesday 4th April 2017

The Rio Tinto-controlled aluminium smelter at Southland's Tiwai Point is benefiting from a "deeply favourable cocktail" of factors that have returned it to profitability and could prompt a restart of its small, fourth production 'potline', says Woodward Partners energy equities analyst John Kidd in the latest of his regular 'Tiwai-o-meter' publications.

But the smelter owner told BusinessDesk that electricity prices remain too high to justify a restart.

The smelter uses around one-seventh of all electricity generated in New Zealand and has struggled under low global aluminium prices in recent years. It renegotiated its contracts for electricity supply before the partial privatisation of its main supplier, Meridian Energy, in 2013.

New Zealand Aluminium Smelters has also been prominent in supporting changes to the price it pays for access to the national grid, where savings of perhaps $20 million a year may be available if Electricity Authority proposals to shift costs northwards succeed.

The threat of the smelter's closure, which NZAS could advise at any time under its revised Meridian contracts, hangs over the electricity industry, which has experienced little demand growth in recent years and would face more substantial over-supply than at present if the smelter ceased operations.

However, Kidd believes current conditions could be rosy enough to move beyond 'business as usual' mode, which the smelter has returned to recently.

"For NZAS, the outlook equation now represents a deeply favourable cocktail of sharply stronger LME (London Metal Exchange) pricing, higher regional sales premia, flat alumina and energy input costs, a weaker New Zealand dollar and roll-off in our assumed out-month capex profile."

The compound effect of these factors "sees our forward index skyrocket into positive territory for the first time since September 2015," Kidd said.

"If value drivers keep tracking as they are we think that NZAS could give serious thought towards restarting its fourth (albeit at 50 Megawatts, much smaller) potline, which has been idle since 2012," said Kidd.

However, NZAS chief executive Gretta Stephens said the fourth potline was closed in 2012 because of high power prices and "since that time the smelter has not been able to secure an affordable electricity arrangement that would allow Line 4 to be operated profitably".

Comments from our readers

No comments yet