KEY POINTS:
At some point, it is highly likely that the Tiwai Pt aluminium smelter will close and Southland will have to deal with the hundreds of job losses. The closure will be part of an international trend that will also buffet Europe. Asia is likely to be the big winner as aluminium producers move to regions that have high demand and cheap labour. According to Rio Tinto Alcan, the owner of the Bluff smelter, there could, however, be another major factor. The Government's planned emissions trading scheme puts the plant on the "path to closure", it says.
Company executives delivered this message to the parliamentary select committee considering climate change legislation. Similar warnings have been given by aluminium producers to European lawmakers. Essentially, they want to be exempted from emissions trading costs until smelters around the world face similar charges. If this does not happen, they say, their operations will not be viable and they will have to shift.
It would be easy to regard Rio Tinto's threat as pure gamesmanship, a bald attempt to minimise its emissions costs. Tiwai Pt's owners have, after all, never been shy to wave a big stick, especially when renegotiating the Lake Manapouri power agreement. Recently, when that contract was renewed until 2030, Rio Tinto raised no concern about the trading scheme. With an eye on the power supply disruptions afflicting aluminium plants in China and South Africa, it was probably more intent on retaining a well-priced and secure arrangement.
Nonetheless, it would be wrong to totally dismiss Rio Tinto's case. New Zealand has few billion-dollar industries and can hardly afford to casually farewell one. Southland's economy also has a particular vulnerability. Further, it is relevant that aluminium is a commodity, subject to global pricing on the London Metal Exchange. A significant increase in Tiwai Pt's costs from the trading scheme could not be passed on to customers. They would simply source cheaper product elsewhere, and the smelter could become uneconomic.
The latter point, and the prospect of smelter relocations to countries with less stringent rules on carbon emissions, persuaded the European Commission to exclude aluminium from its trading scheme when it started in 2005. It is, however, scheduled to be in its revised scheme, covering 2013 to 2020. Such caution has not gone unnoticed by the Government. It has already addressed several of Rio Tinto's concerns.
In the first instance, industries exposed to such competitive pressure will receive free carbon credits (initially covering Rio Tinto for 90 per cent of emissions at 2005 levels). That protection will be phased out after 2018, and last week the endpoint was extended five years to 2030. Just as importantly, the Government proposes two five-yearly reviews of the allocation phase-out. These will examine the international competitive environment.
Such reviews are, in fact, a key Rio Tinto wish. The company sees them as a way of ensuring that protection will be phased out only when its international competitors face a comparable carbon price. For that to happen, there will have to be an intergovernmental pact or the international application of emissions trading. Again, there is no disagreement between Rio Tinto and the Government on the importance of this.
Much will happen on the road to that destination. In time, aluminium producers will have to play their role in combating climate change. Right now, however, New Zealand's proposed emission trading scheme adds another element to a blend that threatens Tiwai Pt. A correct response from the Government will ensure this is not the catalyst for closure. So far, it is on the right track.
