Pattrick Smellie: How to close an aluminium smelter

Tiwai Point aluminium smelter. Photo / Supplied

COMMENT:

Amidst the intense focus on coronavirus, it would be all too easy to forget that the controlling shareholder of New Zealand's largest single electricity user, the Tiwai Point aluminium smelter, is on the verge of deciding whether or not to close it down.

Mining and metals giant Rio Tinto has had the nearly 50 year-old smelter under strategic review since last year and is due to announce a decision by the end of this month.

In other words: within the next 10 days.

The word from some highly placed sources in the electricity industry is that the decision is made and that the smelter, which has produced high quality metal in Southland since the early 1970s, will close.

If correct, that will be devastating news for Southland, and for the New Zealand economy, at a time when the only question on most economists' lips is whether the Covid-19-inspired recession will be deep enough to call a depression.

However, if the decision is to depart, the short term impact of coronavirus won't be a big feature of Rio Tinto's thinking. While the news would be a bombshell, the closure itself will be a slow burn, taking at least one year, probably more like two or even three.

By that time, Covid-19 should mostly be a bad memory.

Closure is a long term decision with long term execution and consequences. Covid-19, for all its severity, is inherently short-lived compared to the life of a large piece of industrial kit which, with the right deal on power prices, could probably lumber on for a couple of decades yet.

The short term realities of the aluminium market – over-supplied even before the world economy went into viral free-fall – may help nudge things along, but whatever Rio decides, it has been a long time coming.

Indeed, it sometimes feels as if it's been coming since day one. The smelter's whole existence has been shrouded in endless argument. It started two generations ago with the controversy over construction of the Manapouri Dam to increase national power supply and make the smelter possible. The modern environmental movement can be traced to the campaign against it.

The arguments have continued ever since about whether the price it pays for electricity is too cheap or an entirely reasonable discount for bulk.

Rio and the smelter's previous owner, Comalco, have tried hard to make New Zealanders love a direct employer of nearly 1,000 highly paid people around Invercargill that produces around 2 per cent of the country's annual export earnings.

A worker seen casting aluminium into a mold at the Tiwai Point aluminium smelter. Photo / Getty Images

But the trope of a bullying Australian corporate is the entrenched perception. Behind closed doors, most politicians accept the smelter is important to the economy, but in public, the smelter has tended to be friendless outside Southland.

In that sense, Rio has very little to lose by leaving.

It would have no other assets in New Zealand anyway, so it wouldn't need the 'social licence to operate' that is the holy grail of most nationally significant firms and which it has barely managed to establish anyway.

If it weren't for the fact that a lot of New Zealanders may rue its loss once it's gone, there might almost be a mutual sense of 'good riddance' in the smelter's departure.

Rio will not want to act as an irresponsible corporate citizen as it departs. But protecting its reputation on the way out will require no more than it treat its people well and meet its obligation to clean up the Tiwai Point site – a potential cost of $300 million-plus.

The desire to avoid that cost has been one of the biggest barriers to a closure decision in the past.

But in the complex business of closing such a large plant, you can be sure that Rio – not to mention Southland and central government – will be looking hard for another tenant to use that land. If one can be found, the need for full clean-up might well disappear.

Among the last pieces of the strategic review is under way now: an assessment of the social and economic impact on the Southland community of closure.

What might other key pieces of the closure process look like?

If the opportunity existed, Rio might try to wrap a Tiwai closure decision up with other, similar decisions in other countries. That would help make the point that New Zealanders have generally misunderstood: that Rio is not bluffing about the potential to shutter its plant here.

It has plenty of other rumpity old plant in other countries whose future is unclear. There is a brace of elderly, inefficient Australian aluminium smelters in its Pacific Aluminium subsidiary, where Tiwai Point is housed on paper. However, none of those are in the same kind of strategic review right now.

The only other smelter facing a closure decision is in Iceland, which also supplies electricity from largely renewable, largely hydro resources. While there is no indication that this is the plan, announcing closures at both Tiwai and the Iceland plant might assist the public relations battle in both cases by demonstrating that neither country is being singled out.

A second key message from a closure decision would be that it won't happen overnight.

Not only can it be planned for, but it will have to be.

It is a complex, technically challenging task to decommission the 400-plus aluminium 'pots' that are housed in the smelter's cavernous production halls.

Rio Tinto is due to announce a decision regarding Tiwai Point's future by the end of this month. Photo / Supplied

Each pot is usually full of molten metal and each would need to be de-commissioned individually – a process taking a week or so. Doing them all could take a year.

Moreover, the smelter must give 12 months' notice of its intention to cancel its massive 620 Megawatt contract. While parts of the plant remain in production, it's entirely possible the company could keep bits of it running opportunistically, in response to the emergence of favourable market conditions.

But does this have to happen?

What Rio would like New Zealanders to answer is: why should it?

The growing expectation that closure is a fait accompli relates to Rio's signal that a 'prudent discount' offer on the high cost of electricity transmission to the smelter is neither enough to prevent closure, and nor would it be delivered quickly enough.

The smelter owners still want a sharper price, driven by its main supplier, Meridian Energy, which it argues is already highly profitable – although Meridian might beg to differ.

Meridian's dollar figure profit figures are high, but its return on the capital assets employed is fairly low, if the accounting treatment of those assets is accepted. Quite a few academics' careers have been sustained arguing the toss on that one.

And the devil is in the detail: a complex matrix created by the interplay of global metal prices, New Zealand wholesale electricity prices, and the value of the smelter's uniquely enormous capacity to release electricity for national need when hydro lakes are low.

To the bluff that the excess power from Tiwai could be used elsewhere and drop power prices nationally, Rio answers quite rightly: it will take eight years to build all the new transmission lines to get that electricity from the bottom of the South Island to the top half of the north.

Electricity generators will also shuffle their plant to prevent a price collapse.

In other words, if cool heads can prevail, is there a middle way here?

One in which all agree that the smelter will close eventually – everyone knows that anyway. So why not make that date eight years away and spend the time preparing for that day?

And in the meantime, swallow a bit of pride and give those damn bullying Aussies another eight years of cheap power. After all, everyone expects a discount for bulk. What's another few years of doing that rather than a more wrenching, albeit manageable, two to three year shutdown that could be avoided?