Dec 12 2019
The expected closure of Rio Tinto’s Tiwai Point aluminium smelter in the Southland region of New Zealand would likely reduce electricity prices for consumers, but also devastate the local economy. The smelter’s financial viability has come under increasing scrutiny in recent months, with Rio Tinto currently conducting a review to determine if its smelting operations in New Zealand can remain viable without government subsidies.
According to industry research firm IBISWorld, the plant’s closure would potentially lead to lower electricity prices. However, significant upgrades to the electricity transmission network would need to be completed before this benefit is passed on to households and businesses.
Factors affecting the Tiwai Point smelter
Aluminium smelting is an energy-intensive process. Extremely high temperatures are necessary to produce pure aluminium at the Tiwai Point smelter. According to IBISWorld, the smelter accounts for up to 13% of New Zealand’s total power consumption each year. Lower aluminium prices and rising energy costs have presented a growing threat to the smelter over the past decade.
‘A further decline in the price of aluminium due to a global oversupply is the most significant factor that could cause the smelter to close,’ said IBISWorld Senior Industry Analyst, Michael Youren.
The Central Government provided a $30 million support package to the smelter in August 2013 to guarantee the smelter remained operational until January 2017. However, the smelter’s viability continues to be challenged.
‘The smelter has had to manage rising operating costs and lower aluminium prices. While the smelter posted a profit of over NZ$200 million for the 2018 financial year, a loss was reported in 2017. Getting the smelter to generate a profit is appearing increasingly unlikely in the future,’ said Mr Youren.
Electricity price relief
According to IBISWorld, the smelter’s closure would exert downward pressure on electricity prices, which have risen significantly over the past five years. Prices have risen due to a supply shortage from the Hydro-Electricity Generation industry, and reduced natural gas supply to operators in the Fossil Fuel Electricity Generation industry. In addition, inefficiencies in electricity market competition have also contributed to price growth over the past five years.
‘Energy market reforms are anticipated to reduce some of the upward pressure on electricity prices going forward, with the Tiwai Point smelter’s closure further reducing these pressures. Lower electricity prices would benefit all consumers, and particularly other industries with high power usage requirements,’ said Mr Youren.
However, lower prices would likely take several years to be passed on to the wider New Zealand electricity market.
‘A lack of transmission infrastructure in the area means that power generated at the Manapōuri power station, which currently supplies the smelter, cannot yet enter the wider grid in any significant capacity,’ said Mr Youren.
Last week, Transpower, the largest player in the Electricity Transmission and Distribution industry, announced plans to integrate the Manapōuri station with the rest of the electricity network. This work is anticipated to take up to three years, and potentially signals stronger expectations for Tiwai Point to close in the future.
Local economic effects
The smelter employs almost 1,000 staff and indirectly supports a further 3,000 jobs in the region. IBISWorld estimates the Tiwai Point smelter makes up as much as 10% of the Southland Region’s economy. Any closure would therefore have a significant effect locally, as many local industries would lose a major source of demand.
‘Several policy options are open to regulators to preserve the smelter, such as tax exemptions or outright government ownership. However, further subsidisation may prove politically difficult. Alternatively, the smelter could be allowed to close and retraining programs could be offered for local employees,’ said Mr Youren.
In any case, the smelter’s future will have a significant effect on New Zealand’s economy, and present a major headache to the Ardern Government.
IBISWorld reports used to develop this release:
- Fossil Fuel Electricity Generation in New Zealand
- Electricity Transmission and Distribution in New Zealand
- Electricity Retailing in New Zealand
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647