09 February 2015

Tiwai could secure multiple power supply contracts

The Southland Times

Tiwai bosses are investigating whether power supply to the aluminium smelter can be secured via multiple contracts beyond 2016 when its existing contract with Meridian Energy can be terminated.

New Zealand Aluminium Smelters (NZAS) and Meridian Energy agreed a new power deal in August 2013, which included Meridian cutting its electricity charges, after a lengthy standoff was ended with the help of a $30 million Government subsidy. The deal was aimed at saving 800 jobs at the smelter after its long-term viability was in doubt. However, the smelter can terminate the contract completely from January 2017 provided it gives 15 months’ notice.

NZAS chief executive and general manager Gretta Stephens said terminating the existing contract in 2017 did not mean the smelter would close as there could be potential to renegotiate its power supply through multiple contracts with different companies - including Meridian.

“These days there’s a lot of different retailers.”

It was a hypothetical situation which management were exploring as it was something that had never been done before, she said.

As part of the Meridian agreement, NZAS also had the option to reduce its contracted volume from 572MW to 400MW from mid-2015, meaning it could go from three pot-lines to two.

“It’s not our first choice to go down to two pot-lines. That’s not what we’re aiming for,” Stephens said.

There were positive indicators around the world aluminium market with prices about 5 per cent higher per tonne than a year ago and demand expected to grow.

The London Metal Exchange price was at $1814.72 ($US) per tonne yesterday down from $1909.46 last month and up from $1727.41 one year ago. In mid-November the price reached $2055.55 per tonne.

Stephens said the price was likely to hover around current levels for some time.

In his speech at Meridian Energy’s 2014 annual meeting, chief executive Mark Binns said whether Tiwai’s owners exercised the right to give Meridian a termination notice with respect to contract on July 1 would be a key issue for Meridian and the industry as a whole.

“If a notice is given, then New Zealand Aluminium Smelters will either need to run the smelter unhedged to the electricity price, find another party that would enter into a similar contract, or close,” he told shareholders.

At the meeting, Binns said two key variables affecting Tiwai’s profitability – the price of aluminium and the New Zealand dollar strength against the US dollar - had both trended positively since the contract was varied in August 2013.

Stephens said NZAS was also having ongoing discussions with Transpower over transmission prices which the company says have increased by $25m a year since 2008, despite the smelter using 10 per cent less electricity.

She said the smelter was well maintained after “mid-life” plant work done in the previous few years, and while the capital programme for this year was “restrained”, management were taking a long-term view. They were still not in a position to turn pot-line four back on but were maintaining the ability to do so, she said.

Venture Southland group manager business and strategic projects Steve Canny said the idea represented a fundamentally sound proposition.

NZAS would need to be able to secure a reliable, alternative supply but there was no question it was an option, he said.