16 June 2015
The power supply contract deadline that could see New Zealand Aluminium Smelters close is looming but a report from the smelter shows it was still investing capital and upping production.
Despite this, industry analysts are still not confident of the outcome as aluminium prices had fallen from more than US$2000 a tonne late last year to about US$1700 this month, around one-year lows.
The NZAS 2014 sustainable development report shows the Tiwai Pt smelter increased production of aluminium by 3500 tonnes since 2013.
However, this still fell short of the 5000 extra tonnes smelter bosses had projected because fewer potlines had been operating.
Under a contract with Meridian Energy, NZAS has the option to terminate its power deal on July 1 2015, with effect from January 1, 2017, or to reduce the contract volume to 400MW by January 1, 2107.
NZAS chief executive Gretta Stephens said NZAS was committed to working as hard as it could to ensure NZAS continued to operate at 572 MW and remained a key sustaining element in the NZ economy.
Meridian chief executive Mark Binns said discussions with NZAS were ongoing.
“At this point I have no idea which way the decision will go.”
Craig Stent of Harbour Asset Management said the energy sector was waiting for an announcement from the smelter, which would be the first of several windows to make a statement regarding their electricity contract with Meridian.
With a lower NZ dollar, most energy commentators expected NZAS would seek to maintain power contracts, with the potential to gain some supply from another generator.
Abandonment of Tiwai would seem an unlikely event, but negotiations could restart on a number of matters that influence the overall electricity market, he said.
Woodward Partners head of research director John Kidd said discussion about NZAS in the market had been subdued by commercial sensitivity surrounding a gagging clause in its $30m deal with the Government.
In a March analysis published to clients, the sharebroking and corporate advisory firm said the smelter was in a much better position than it was in 2013. However, aluminum prices had come down quite significantly since its findings, while the New Zealand dollar had depreciated.
“The numbers are less favourable than they were in March but we are still seeing the operation remaining profitable.”
The closure scenario was unlikely, because it would mean site remediation costs of about $500m. It was probable that the smelter would cut its Meridian contract and try to get a price deal on the extra 172MW from another power company.
Speculation surrounding the possible sale process, which could be underway, added complexity to the situation, he said.
In 2013, the smelter renegotiated its power contract with Meridian Energy to pre-2013 price levels, and also picked up a $30m payment from the Government to keep it running.
Stephens said her team proved they could deliver under challenging circumstances but the smelter was still exposed to market volatility with the current exchange rate and price of aluminium.
The report says prudent investment meant that NZAS remained a high-tech, world class operation and saved $29m through business improvement initiatives.
In 2013, capital investment was sharply reduced but an increase in world aluminium prices and market premiums in 2014 saw more investment projects. These subsequently dropped in 2015, with average prices at historical lows, Stephens said.
In the report Stephens said the smelter faced the commercially uncompetitive position because it paid internationally high prices for electricity and transmission.
NZAS Chairman Brian Cooper had previously told The Dominion Post, last year the smelter paid $64m in transmission costs alone.
Despite using 10 per cent less electricity, transmission costs had increased by $25m per year since 2008 and without reform, were expected to increase to $34m by 2019, the report says.
NZAS which reported underlying earnings of $56m, is the largest consumer of electricity in the country, using 13 per cent.