Smelter's profit more than halved

Escalating electricity costs have hurt New Zealand Aluminium Smelters' profit. Photo: ODT files.
Escalating electricity costs have hurt New Zealand Aluminium Smelters' profit. Photo: ODT files.
Rio Tinto-owned New Zealand Aluminium Smelters' (NZAS) Tiwai Point operation at Bluff has had its underlying profit slashed by more than 50% to $25 million, in part due to escalating transmission costs.

Rio Tinto's latest attack on transmission costs looks set to reignite concerns about the smelter's viability and future, with tough negotiations ahead for Meridian Energy, the Electricity Authority, Transpower and even the Government.

NZAS chief executive Gretta Stephens said despite a record production year in 2016, the smelter's $54million underlying profit in 2015 declined to $25million during 2016.

''At NZAS, we run a world-class operation, but despite breaking a production record in 2016, costs have eroded profits.

''When it comes to transmission charges, we believe you should pay for what you use.

''This isn't what is happening now, so we're committed to working with the Electricity Authority and Transpower to achieve a more sustainable method of pricing transmission services,'' Ms Stephens said in a statement yesterday.

NZAS broke its hot metal production record in 2016, producing 338,556 tonnes of saleable aluminium from its three P69 Reduction Lines, up more than 5000 tonnes on 2015.

NZAS, 79.36% owned by mining giant Rio Tinto and 20.64% by Japan's Sumitomo, has thrown the country's electricity sector into turmoil.

NZAS uses about 13% of the country's electricity and if it gave notice of closure that would leave excess electricity in the market, a scenario which has led some generators to mothball some projects.

Ms Stephens said yesterday the consistently weaker New Zealand dollar softened the blow of low global aluminium prices, which had languished around $US1605 ($NZ2276) per tonne, a decrease of around $US60 per tonne on 2015's already historically low prices.

She said the financial results had to be seen within the context of NZAS transmission costs.

Despite NZAS ''shaving off'' the equivalent power use of 1000 average homes from its lighting and cooling workload, Ms Stephens said it could not control transmission costs.

Transmission costs were $67million for the 2016 pricing year, more than two and a-half times the amount of NZAS's underlying profit. For the 2017 pricing year, transmission costs would increase another $5million to $72million for the year.

''This increase in transmission charges is on top of a significant increase in contracted electricity charges in 2017,'' Ms Stephens said.

NZAS paid about 9% of Transpower's transmission charges to consumers, including paying towards the $1.3billion spent on the upper North Island grid upgrade since 2004, without receiving any additional benefit to its business.

While NZAS was well placed to provide low carbon aluminium to the growing market for lightweight automotive metal, Ms Stephens said paying one of the highest power and transmission prices of any smelter in the world outside China made it harder to compete in the highly competitive aluminium market.

In August 2015, a power deal was struck between Rio Tinto and supplier Meridian Energy. NZAS said at the time the deal, for 572MW of electricity until 2030, would allow its three potlines to remain fully operational.

Meridian said at the time it was committed to cover Tiwai Point's electricity usage at then current production levels through to 2030.

However, NZAS retains all its termination rights from the 2013 negotiations, which includes a 12-month notice of termination which came into force on January 1 this year.

During the 2013 negotiations, NZAS got a contentious $30million sweetener from the Government to remain open, which the Government said in 2015 it would not repeat.

Tiwai Point contributes about $525million to Southland's economy, or 10.5% of the province's gross domestic product, and supports 3200 jobs.

Rio Tinto had the ageing Tiwai Point and other smelters for sale, and while Tiwai makes some of the highest grade aluminium in the world, there were no takers.

Closing the 46-year-old Tiwai smelter would trigger a site clean-up costing hundreds of millions of dollars.

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